Production :
“The act of making goods and services and thereby adding utility to the object is called production in economics”.
Production Function :
Production process involves the use of various inputs or factor services to produce output.
Example, To produce shoes, we require inputs such as shoe workers, leather, glue, shoe making machine etc.
Output, is a function of input like land, labour, capital etc. Thus, the functional relationship between inputs and output is referred to as “Production Function”.
“A production function shows the maximum quantity of a commodity that can be produced per unit of time with the given amount of inputs, when the best production technique available is used”.
OR
” The minimum amount of inputs that are required to produce a certain level of output with the use of the best available technique of production”.
Production function is expressed in the form of algebraic equation :
Qx = f (f1, f2, f3…..fn). ……..(1)
Where Qx = quantity of output of commodity X
f1, f2, f3,…fn = physical quantities of different inputs used to produce X.
Qx is dependent variable and f1, f2, f3,… fn are independent variables.
If we consider only 2 input say labour (L) and Capital (K) then,
Qx = f (L, K) ………(2)
Important notes :
- Production function is expressed with reference to a particular period of time, example : quantities per period of time.
- Production function expresses a physical relationship between both inputs and outputs.
Question : Define production function ? Different between short – run and long – run production function ?
Question : Distinguish between short run and long run.
Question : Explain briefly the two types of production function.
Distinguish between the 2 time period:
Short Run and Long Run:
|
SN |
Short Run |
Long Run |
|
1 |
Short Run |
Long Run |
|
2 |
For Example, |
All the factors |
Distinguish between :
Short Run Production function and Long Run Production Function :
|
SN |
Short Run |
Long Run Production |
|
1 |
It studies |
It |
|
2 |
The response |
The response |
Total, Average and Marginal Production (TP, AP and MP) :
1. Total Production (TP) :
Total product / total physical product refers to the total amount of a commodity produced, during some specific period of time by combining a particular quantity of variable factor with given quantity of fixed factor.
It is also called ‘ total returns’ .
2. Average Product (AP) :
Average product or average physical product of a variable factor refers to the output per unit of a variable factor.
AP = Total Output / Total number of variables factor.
APL = TPL/ L
APL = the average product of labour
TPL = the total product of labour
L = quantity of labour (in case of variable factor = labour)
3. Marginal Product (MP) :
It is the change in total product resulting from the use of one additional unit of a variable factor.
Also called “marginal returns’.
MPL = ∆TP / ∆L
MPL = marginal product of a variable factor labour
∆TP = change in total product
∆L = change in variable factor, labour
Marginal Product,
MPnth = TPnth – TP(n-1)
Relationship between Average Product (AP) and Marginal Product (MP) :
The relationship between AP and MP is as follows :
1. When MP > AP , this means that AP is rising.
If an additional worker increases the average product of all the workers, the marginal product (MP) of the additional worker must be greater than Average Product (AP) of the existing workers.
2. When MP = AP , this means that AP is constant.
3. When MP < AP, this means that AP is falling.
4. MP can be positive, zero or negative, but AP is always positive after output starts occurring.
Diagrammatic relation between MP and AP:
Relation between Average and Marginal Product
1. As long as MP curves lies above AP curve, the AP curve is positively sloping curve means AP is rising. It doesn’t matter whether the MP curve itself is sloping upwards or downwards. (MP >AP)
2. When MP curve intersects AP curve, this is the maximum point of AP curve. (MP = AP)
3. When MP curve lies below the AP curve, the AP curve slopes downward, AP declines. ( MP < AP)
Relationship between Total Product (TP) and Marginal Product (MP) :
1. When Total Product (TP) increases at an increasing rate, marginal product (MP) increases.
2. When total product (TP) increases at a diminishing rate, marginal product (MP) declines.
3. When total product (TP) reaches its maximum, marginal product (MP) becomes zero.
4. When total product (TP) begins to decline, marginal product (MP) becomes negative.
Diagrammatically :
Relation between Total and Marginal Product
1. When marginal product (MP) is rising, total product (TP) increases at an increasing rate.
2. When marginal product (MP) is declining, total product (TP) increases at a diminishing rate.
3. When marginal product is zero (MP = 0) , total product (TP) is maximum.
4. When marginal product (MP) is negative, total product (TP) begins to decline.
Returns to a Factor:
“Returns to a factor means change in the physical quantity of a good when the quantity of one factor is increased, while that of the other factors remain constant”.
Or
” Change in the quantity of output, when the quantity of one input factor is increased, while that of the other factors remain constant”.
Returns to a factor is a short run phenomenon.
Three possibilities of returns to a factor:
1. Increasing Returns to a Factor
2. Constant Returns to a Factor
3. Diminishing Returns to a Factor.
1. Increasing Returns to a Factor :
It refers to a situation in which each additional unit of the variable factor increases the total output i.e. the MP of a variable increases as more of it is used.
Total output increases at an increasing rate with each additional unit of variable factor used.
2. Constant Returns to a Factor:
It is a situation, in which additional units of a variable factor adds the same amount of output.
The MP of variable factor is constant.
Each additional unit of variable factor increases the output at constant rate.
3. Diminishing Returns to a Factor:
It refers to a situation when marginal product (MP) of a factor falls as more of it is used.
In this situation, as more units of variable factor is combined with the fixed factor, the output tends to increase at a diminishing rate.
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