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THEORY OF Production. PRODUCTION THEORY. Labour + capital = Output. THEORY OF PRODUCTION EXPLAIN A INPUT-OUTPUT RELATIONSHIP, A FIRM SO AS TO MINIMIZE COST OF PRODUCTION. Isoquants. - PowerPoint PPT Presentation
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THEORY OF PRODUCTION
PRODUCTION THEORY
THEORY OF PRODUCTION EXPLAIN A INPUT-OUTPUT RELATIONSHIP, A FIRM SO AS TO MINIMIZE COST OF PRODUCTION.
Labour + capital = Output
ISOQUANTS Similar to IC curve, Equal-product curve
or isoquants represents all those input combinations which are capable of producing the same level of output.
ISOQUANTS CONTINUE….
Various factors combination Isoquants
Factor Com.
Factor X
Factor Y
A 1 12
B 2 8
C 3 5
D 4 3
E 5 2 1 2 3 4 50
2
4
6
8
10
12
14
12
8
5
3
2
Factor X
Factor Y
TOTAL PHYSICAL PRODUCT (TPP)
AVERAGE PHYSICAL PRODUCT (APP) APP = TPP / amount of input
Quantityof labor TPP APP
0
5
10
15
20
25
30
35
40
45
0
50
120
180
220
250
270
275
275
270
-10
12
12
11
10
9
7.86
6.88
6
MARGINAL PHYSICAL PRODUCT (MPP) the additional output that results from
the use of an additional unit of a variable input, holding other inputs constant
measured as the ratio of the change in output (TPP) to the change in the quantity of labor (or other input) used
COMPUTATION OF MPP AND APP
Note that the MPP is positive when an increase in labor results in an increase in output; a negative MPP occurs when output falls when additional labor is used.
Quantityof labor TPP APP
0
5
10
15
20
25
30
35
40
45
MPP0
50
120
180
220
250
270
275
275
270
-10
12
12
11
10
9
7.86
6.88
6
10
14
12
8
6
4
1
0
-1
TPP
SHAPE OF MPP CURVE
MPP rises when TPP increases at an increasing rate, and declines when TPP increases at a decreasing rate.
MPP is negative if TPP declines when labor use rises
RELATIONSHIP OF APP AND MPP
APP rises when MPP > APP
APP falls when MPP < APP
APP is maximized when MPP = APP
LAW OF VARIABLE FACTOR PROPORTION
PRODUCTION FUNCTION The functional relationship between
physical inputs and physical outputs of a firm is known as production function. Algebraically production function can be written as q= f(a,b,c,d……..)
Where q stands for quantity of output and a,b,c,d stand for quantity of factors of production. f denotes for unspecific relationship between inputs and outputs.
PRODUCTION FUNCTION ..CONTINUE In economics we are interested in two
types of production functions:- (i) Law of variable factor proportion (law of
diminishing returns) (ii) Return to scale
FORMS OF PRODUCTION FUNCTIONS Linear homogenous production function
It implies that if inputs increase in same proportion outputs increase in same proportion, it is known as HPF of first degree.
Cobb-Douglas production function.
