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Production refers to the transformation of resources into

outputs of goods and servicesFOR INSTANCE : General motors (G.M.) hires workers who use machinery in factories to transform steel , plastic , glass , rubber , etc into

AUTOMOBILES Steel + Plastic + Glass + Rubber + Motor parts = CRUZE

PRODUCTION FUNCTION : It’s the functional technical relationship between physical inputs and outputs of a firm.

P = F [ L, K , S ]

Factor of production

In economics, factors of production (or productive inputs or resources) are any commodities or services used to produce goods and services.

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FIXED AND VARIABLE INPUTS

• FIXED FACTOR OF PRODUCTION :• It is defined as the quantity of which cannot be changed in

the short run as the level of output changes e.g. building , plants , supply of skilled labour.

• VARIABLE INPUTS It is defined as the one in which the quantity may be changed

in the short run as the level of output changes. Some examples are raw material , Labour services.

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HOW WILL TOTAL OUTPUT CHANGE WHEN ALL INPUTS EXCEPT FOR ONE

ARE FIXED ?

This law states that as one variable factor is combined with other fixed factor of production then the proportion of the factors is changed and the TP at first rises more than proportionately , then equiproportionately , finally less than proportionately.

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(1) Only 1 factor is variable.(2) All units of variable factors are

same.(3) Technique of production is

constant.(4) Factor’s of production can be

used in different proportions.

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Title

BEHAVIOR TP MP

STAGE 1 TP increases at increasing rate

Increasing

STAGE 2 TP increases at diminishing rate becomes MAX &

CONSTANT

BECOMES max & STARTS falling , becomes ZERO.

STAGE 3 TP starts falling IT becomes NEGATIVE 8

SCHEDULE

Units of LabourUnits of Labour TPTP MPMP

I StageI Stage

II StageII Stage

III StageIII Stage

11 8080 8080

22 170170 9090

33 270270 100100

44 368368 9898

55 430430 6262

66 480480 5050

77 505505 2424

88 505505 00

99 495495 -9-9

1010 470470 -25-25

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STAGE OF RATIONAL DECISION

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THE GREATEST OUTPUT IS AT THE END OF STAGE 2. THEREFORE STAGE 2 IS IDEAL BECAUSE

THERE IS BALANCE BETWEEN PRODUCTIVITY AND TOTAL

OUTPUT.

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