Meaning of production Production refers to the

transformation of inputs or resources into outputs or goods and services.

- production is a process in which economic resources or inputs are combined by entrepreneurs to create economic goods and services.

Production Function The term production function refers to

the relationship between the inputs and the outputs produced by them.

- The term factors of production and resources are used interchangeably with the term inputs.

A production function describes the technological relationship between inputs and outputs in physical terms

The relationship is purely physical or technological in nature, thus it ignores the prices of inputs and outputs.

The study of production function is directed towards establishing the maximum output which can be achieved with a given set of resources or inputs with a given level of technology.

The production function can be stated in the general form of an equation

Y= f(L,C,T,t,M etc)

In economic theory we are concerned with the three types of production function,

Production function with one variable inputs

Production function with two variable inputs

Production function with all variable inputs.

Production function with one variable inputs.

Law of variable proportions. In economics, Production function

with one variable input is illustrated with the well-known law of variable proportions.It has also been called as the law of diminishing marginal returns.

When increasing amounts of one factor of production are employed in production along

with a fixed amount of some other production factor, after some point, the resulting

increases in output of product(Marginal Product) become smaller and smaller.

Prof.Benham – As the proportion of one factor in a combination of factors is increased,after a point, first the marginal and then the average product will diminish.

The point worth noting that the law does not state that each and every increase in the amount of variable factor employed in the production process will yield diminishing marginal returns.

It is possible that initial increases in the amount of variable factor employed in the production process may yield increasing marginal returns.However a point will be reached where the marginal product will begin declining.

Assumptions. - Constant technology

If technology changes, marginal and average product may rise instead of diminishing.

- short run The law operates in the short run

because it here that some factors fixed and others

are variable.In the long run, all factors are variable.

- homogenous inputs The variable input as applied unit by

unit is homogenous or identical in amount and quality

- It is possible to use various amounts of

a variable factor on the fixed factors of production.

A of LaborA of Labor TPTP APAP MPMP

11 1010 1010 1010

22 3030 1515 2020

33 6060 2020 3030

44 8080 2020 2020

55 9595 1919 1515

66 108108 1818 1313

77 112112 1616 44

88 112112 1414 00

99 108108 1212 -4-4

1010 100100 1010 -8-8

The production function with two variables

A firm may increase its output by using more of two variables that are substitutes for each other,eg,labour and capital

- There may be various technical possibilities of producing a given output by using different factors of production.

Iso – quants. - An isoquant is also known as Iso –

product curve or a producton indifference curve.

Iso – quants show the various combination of two variable inputs that results in same level of output.

CombinaCombinationstions

Units of Units of loborlobor

Units of Units of capitalcapital

Total Total productproduct

MRTSMRTS

AA 11 2020 5050

BB 22 1515 5050 5:15:1

CC 33 1111 5050 4:14:1

DD 44 88 5050 3:13:1

EE 55 66 5050 2:12:1

FF 66 55 5050 1:11:1

MRTS MRTS is the rate at which one factor

input can be substituted for another, keeping the total output constant. MRTS of L for K is defined as the number of units of input K that a producer is willing to sacrifice for an additional unit of C to maintain the same level of output.

Iso – cost Curves Iso cost lines represents the

combinations of two inputs that a produces can afford or apply with his given income and input prices.

Iso cost line is influenced by two important factors

Input prices Monetary resources.

Optimum factor combinations

The laws of returns to scale. The laws of returns to scale explain the

behaviour of the output in response to a proportional and simultaneous change in input. Increasing inputs proportionately and simultaneously is, in fact an expansion of the scale of production.

In the long run, output can be increased by increasing the scale of operations .Increasing the scale of operations means increasing all the factors at the same time and by the same proportions.

Returns to scale are classified as; - Increasing Returns to Scale If output increases more than

proportionate to the increase in all inputs.

- Constant Returns to Scale If all inputs are increased by same

proportions ,output will also increase the same proportion.

- Decreasing Returns to Scale If output increases less than

proportionate to the increase in all inputs.