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PRODUCTION FUNCTION ( RETURNS TO FACTOR)
→ MEANING OF PRODUCTION
Production is defined as the transformation of inputs into output. Production includes both production of physical goods and production of services
→ PRODUCTION FUNCTION
• The term production function means the technical and physical relationship between inputs used and the resulting output.
• It includes only technically efficient combinations of inputs (i.e., those which minimise the cost of production).
• A production function is expressed as:
Q=f (K, L) Where Q is output, labour (L) and capital (K), required to produce a good
Types of Production Function
• Short-run Production Function. It refers to production in the short-run where there are some fixed factors. In short-run, production increases when more units of variable factors are used with certain amount of fixed factor.
• Long-run Production Function. It refers to production when all factors are increased in the same proportion Fixed Factors and Variable Factors Fixed factors refer to those factors whose supply cannot be changed during short run. E.g. land, plant, factory building, minimum electricity bill, etc. Variable factors refer to those factors whose supply can be varied or changed. E.g. raw materials, daily wage workers, etc.
→ CONCEPTS OF PRODUCT
• Total Physical Product (TPP) or Total Product (TP): It is defined as the total quantity of goods and services produced by a firm with the given inputs during a specified period of time.
• In the short-run, TP can be increased by employing more units of the variable factor.
• In the long-run, TP can be increased by employing more units of all factors.
TP curve starts from the origin, increases at an increasing rate, reaches a maximum and finally decreases at an increasing rate
→ Average Product (AP)
Average Product (AP): It is defined as the amount of output produced per unit of the variable factor (labour) employed
AP = Total physical product / Labour Input = TP / L
AP is zero when no labour is employed. Initially, AP increases, reaches maximum and finally starts declining. AP curve is an inverted U-shaped.
→ Marginal Product (MP)
It is defined as the change in TP resulting from the employment of an additional unit of a variable factor (labour). symbolically, MP can be written as :
Initially MP increases with employment of units of labour. MP starts declining to become zero and finally becomes negative. MP curve is inverted U-shaped.
Relationship between TP, AP and MP Curves
• AP curve is the slope of the straight line from the origin to each point on the TP curve. MP curve is the slope of the TP curve at each point.
• When AP is maximum, MP = AP.
• When TP is maximum, MP = O.
• When TP is falling, MP is negative.
• Both AP and MP curves are inverted U-shaped.
Law of Diminishing Marginal Product
If we keep increasing the employment of the variable input with other fixed inputs then eventually a point will be reached after which the marginal product of that input will start falling. MP of a factor input initially rises, when the level of employment of the input is low, but after reaching a certain level of employment, it starts falling.
The Law of Variable Proportion
Statement of the laws Law of Variable Proportion
The law of variable proportion states that when total output or production of a commodity is increased by adding units of a variable input, while the quantities of other inputs are held constant, the increase in total production, after some point, diminishes.
• Assumptions of the Law
• The assumptions of the law of variable proportion are:
• State of technology remains the same.
• All units of the variable factor, labour, are homogenous.
• There must always be some fixed input and diminishing returns results due to fixed supply of the fixed factor.
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