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Theory of Production: WWW - Edutap.co - in
Theory of Production: WWW - Edutap.co - in
Theory of Production: WWW - Edutap.co - in
Theory of Production
Production Function
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Agenda
Production Function
MRTS
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What is Production Function
inputs are called factors of production
Rational producer is always interested that he should get the maximum output from the set of resources
or inputs available to him
What is Production Function
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Agenda
Production Function
MRTS
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Law of Returns – Short Term
Law of Variable Proportions or Law of Diminishing Returns
"As equal increments of one input are added, the inputs of other productive services being held constant,
beyond a certain point, the resulting increments of produce will decrease i.e., the marginal product will
diminish".
The law of increasing returns is also called the law of diminishing costs. The law of increasing return states that when
more and more units of a variable factor is employed, while other factor remain fixed, there is an increase of production
at a higher rate
The law of constant returns also called law of constant cost. It is said to operate when with the addition of successive
units of one factor to fixed amount of other factors, there arises a proportionate increase in total output.
Law of Returns – Short Term
Law of Variable Proportions or Law of Diminishing Returns
"As equal increments of one input are added, the inputs of other productive services being held constant,
beyond a certain point, the resulting increments of produce will decrease i.e., the marginal product will
diminish".
The law of increasing returns is also called the law of diminishing costs. The law of increasing return states that when
more and more units of a variable factor is employed, while other factor remain fixed, there is an increase of production
at a higher rate
The law of constant returns also called law of constant cost. It is said to operate when with the addition of successive
units of one factor to fixed amount of other factors, there arises a proportionate increase in total output.
Law of Returns To Scale – Long Term
Increasing Returns to Scale
Leads to lower average cost per unit produced as
the firm enjoys economies of scale
MRTS
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Short Run – Some Factor Variable
The short run is a period of time in which only some inputs (say labor) is allowed to vary while other inputs land
and capital are held fixed. In the short run, therefore, production can be increased with one variable factor and
other factors remaining constant. In the short run, the law of variable proportion governs the production behavior
of a firm
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Short Run - Law of Variable Proportions
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Short Run - Law of Variable Proportions
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Short Run - Law of Variable Proportions
Stage 1:
Total Output Increase
AP keeps on increasing
Marginal Product reaches peak and then starts decreasing but
remains above AP
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Short Run - Law of Variable Proportions
Stage 2:
Total Output Increase
AP starts decreasing but remains positive
Marginal Product keep on decreasing and comes below AP but
still remains positive
MP cuts AP at its highest point
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Short Run - Law of Variable Proportions
Stage 3:
Total Output decrease
AP keeps decreasing but remains positive
Marginal Product keep on decreasing and remains below AP
and turns negative
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Agenda
Production Function
MRTS
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Long Run
The long run is the lengthy period of time during with all inputs can be varied. There are no fixed output in the
long run. All factors of production are variable inputs.
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Long Run
The long run is the lengthy period of time during with all inputs can be varied. There are no fixed output in the
long run. All factors of production are variable inputs.
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Agenda
Production Function
MRTS
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Isoquant
The concept of isoquant or
equal product curve can be
better explained with the help
of schedule given below:
Isoquant Map
Isocost Lines
A firm can produce a given level of output using efficiently different combinations of two inputs.
For choosing efficient combination of the inputs, the producer selects that combination of factors which has the lower cost of
production.
The information about the cost can be obtained from the isocost lines.
Agenda
Production Function
MRTS
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Marginal Rate of Substitution
Marginal rate of technical substitution (MRTS) is:
"The rate at which one factor can be substituted for another while holding the level of output constant".
Marginal Rate of Substitution
Marginal rate of technical substitution (MRTS) is:
"The rate at which one factor can be substituted for another while holding the level of output constant".
Diminishing Marginal Rate of Technical Substitution.
The decline in MRTS along an isoquant for producing the same level of output is named as diminishing marginal
rates of technical education. As we have seen when a firm moves down from point (a) to point (b) and it hires
one more labor, the firm gives up 4 units of capital (K) and yet remains on the same isoquant at point (b). So the
MRTS is 4.
If the firm hires another labor and moves from point (b) to (c), the firm can reduce its capital (K) to 3 units and
yet remain on the same isoquant. So the MRTS is 3.
If the firm moves from point (C) to (D), the MRTS is 2 and from point D to e, the MRTS is 1. The decline in
MRTS along an isoquant as the firm increases labor for capital is called Diminishing Marginal Rate of
Technical Substitution.
Agenda
Production Function
MRTS
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Optimum Factor Combination
Here the isocost line CD is tangent to the iso-product
curve 400 units at point Q.