| Production functi to Scale — coy Marginal Prod on — Short Run — uct curves — Long Run — Law of Variable Proportions — nomies, Diseconomies — Shay Relationships am¢ Returns pes of Average Product, Total Product and ong thos GD Provuction FUNCTION By production we mean transfo) as factors of production. Output is nothi utility can be obtained. I A firm is defined as a technical unit in e production resources or may be produced by a firm. In the traditional anal inputs— land, labor cannot be reproduced. L: measured in labour hour: Capital is that part of tot: production process, rathe! individual or an institution and organise the entrepreneur. whose main ta In the analysis of production we Produces only one product, Q, whose this output the firm use denoted by x, and x, 449 t is assumed that productio lysis of production, it is ur, capital and organisation. | abour is the service re 's. Capital is defined as Production process. The make quantity is de: s two inputs : X; and X respectively, (3) The rming inputs into outputs which yield utility. Input is anything which is used in the prot duction process. Inputs are also known ing but the final production from which n takes place only ina firm. its are employed to produce Process may be obtained from natural which input assumed that there are four Land is given by nature which ndered by workers. It can be produced means of production. ed. Organisation refers to an ask is to hire other factors of production organiser is also known as the certain assumptions : (1) The firm noted by g. (2) To produce »- The quantities of X, and X, are Output is obtained in the same periodTheory of Production f) 45 ‘ in which inputs are employed. There is no time lag in the production process. (4) Inputs and outputs are regarded as flows of goods and services. They are measured as flows per period of time. The relation between inputs employed and output produced is expressed by the concept of production function. Symbolically, the production function can be written as q = f(x, x9). This means that the quantity of output produced depends on the quantities of inputs employed. More specifically, the production function gives us the maximum amount of output which can be obtained by employing different inputs. For one value of. x, and one value of x, we can get one value of g. This g represents the maximum amount of output which can be obtained from the given input combination. In this context we can make a distinction between production function and technology. Technology gives us information regarding how much output can be obtained by different input combinations. But in the production function it is assumed that optimum technology is used in the production process. The maximum output as given by the production function can be obtained only when the technology is the most efficient. Since technological efficiency is assumed to prevail, the production function is called a technological relation. If the qualities of the inputs are improved so that more output can be obtained by employing the same quantities of inputs, then it is said that technology has improved. In our analysis it is assumed that the technology remains unchanged. The general form of the production function is given by q = f( (xX, X9). It only means that gdepends on x, and xp. If x, changes or x, changes or if both x, and x, change, q will also change. But how much change will take place in g due to a given change in x, and x, can be known only from the specific form of the production function. The specific form of the production function may be of different types. For example, g =x x) or g =5x, + 3x, are two specific forms of the production function. The specific form of the production function will depend on the nature of the production process. The exact relation between the change in input and the change in output cannot be known unless the specific form of the production function is known. ; Fe i @B stort RUN AND LONG RUN _ . The production function can be considered either in the context of short-run or in the context of long run. Let us now consider the definitions of short run and long run. By short run we mean.a period of time during which all factors of production cannot be changed. In the short run some inputs remain fixed while some are enna (os the other hand, by long run we mean a period of time during which all inputs are variable and there are no fixed inputs. There is no hard and fast rule about how long the_long run will be. The length of the long run may be different for different commodities. In the case of commodities where the fixed factors of production can be changed in a relatively short period of time the long run can be regarded as a relatively short period of time. But in the case of commodities requiring a relatively longer period of time to change fixed inputs the long run will be a relatively long period of time. For exanple suppose we are considering long runs in the case of production of paddy and production of iron and steel. Fixed inputs can be changed more quickly in the.case.of production of Paddy than in the case of production of iron and ateel. Hence the long run will be46 9 Mlaher Secondary Economlcs relatively short for the production of paddy and rel jron and steel ct nat PRODU @® ror PRoDUCT, averace PRODUCT AND MARGINA e \ production of Jatively lone for the P n Total Product ‘ th the help of two Let us suppose that the firm is producing one output we ey where q inputs. The production function of the firm is of the form posent the 4 ntitie® apresents the quantit total product and £ and %2 rep! s the quantity of lola produ Ax) nd Xy the quant! y me of two inputs. Let us assume that of the two inputs eg swords Jet us 288 vemains fixed and the quantity of X; is variable. In othe toe that in tbe that X, is the variable input and X, is the fixed input ey er a different values production funetion x is ronatant at x, and%1 1 © Mus of 7 total of x, we shall then get different values of These Vom ie an another product of X; for different values of X,. I we plot 1 ot one wigand £ THS curve ‘axis we can get a curve by plotting different com ination’ of xe fand vary Xy Similarly va a 1. the total product js called the total product curve of we can get different values of qand from this we can ;, the quantity of total curve of Xp. hen ‘Two features of total product can be mentioned. 1" 7 elevel product depends on the quantity of the variable input employee ee ta of employment of the variable input We can get one lee of ° , a ae total product refers to probable output and not actu oul maximum amount of output which can be obtained from ifferent ; employment of inputs. ‘Thus, this output refers to probable output or potential output. th Average Product ‘Average product of any inpu' ratio of total product to the total input and ifqis the quantity of output then + represents the average product tis total product per unit of that input. It is the input employed. Ifx, is the quantity of variable of X;. It represents the amount of output which can be obtained by employing ar q one unit of Xy. Similarly, x9 represents the average product of Xq. The average product of any input depends on the quantity ofthat input. As the quantity of the input changes the average product also changes. t} Marginal Product Marginal product of any input represents the change in output which can be ee by increasing or decreasing one unit of that input, other inputs remaining eae sities are two inputs X and X, then the marginal product of X, will oe unt of output which can be obtained by employing one additional unit , X, remaining the same. Similarly, the marginal product of X, is the additional amount of output which can be obtainet of X,, X, remaini .d by employing one extra unt , remaining the same. If we assume that the quantity aX, increases bY Ax, units and as a result t t incr’ AD atl be tte 1 asa result total outp' its then eases by Aq units thi will be 7.4 Theory of Production | 4/ al product of X. In th , 4g marginal p 1 tn the same way, TR will be the marginal product of Xy. It should be noted that average product of X, is , but the marginal product of ig AL. Like aver duct of m X,is 7 Li age Pro uct of any input the marginal product of that input also depends on the quantity of that input employed. For dil 1 units of any input the average and marginal products will be different, From the definition of marginal product it can be said that the marginal product of any input will be positive if the total product increases with the increase in the employment. of the input. If the total product remains constant when any input is increased by one unit then the marginal product of that unit is zero. Similarly, if total product decreases as a result of employing one additional unit of any input. then the marginal product of that unit is negative. The relation among total product, average product and marginal product can be explained with the help of the following table. SU product, Average product and Marginal product Quantity of X, Total Product | Average Product Marginal employed Product 1 10 10 10 2 Let us assume that we are increasing input X,, input Xo remaining the same. When one unit of X, is employed total product is 10 units. Hence, average product will be 0 or 10 units and marginal product will also be 10 units. Now suppose that two units of X; are employed and asa result total product becomes 7 26 . 26 units. Then average product of X; will be “> or 13 units. Thus, while the aver he first unit of X, is 10, that of the second unit is 13. Again, a Sot of xis employed total product is 10 and when one jeasitensl a of X, is employed total product becomes 26. Hence, total product Lote : units when the additional unit of X; is employed. Hence, the marginal p1 ; a of the second unit of X, is 16. In the same way, when 3 units of X, are employ’ total product increases to 42. The average product of the 3rd unit is “3° OF 4 and the marginal product of the 3rd unit is 42 — 26 or 16. In this way aces ie average product and marginal product for different units of X, as sho table given in this page.Higher Secondary Economics rod ’ tions (1) When oe same lal P hove table we can get the following re! emains ti8 tat roduct is positive. When tot eee 1 roduc d when total product decrea! “worage P 7 first increases marginal PI marginal product is zero ani on negative. (2) For the first unit of the input, total pros atl for the marginal product are identical. For ae ial product a al ct ; m 7 unit of X, total product, average product an' me at ‘mari a reve net ct can never be zero OT ve arginal produ 1080 d The cumulative sum 0 su : : argin us total product. For example, for the first unit of es Tre sum total product is also 10. When 2 units of X, are emP loy - 5 10 + 16= 26 which is welt products of successive units i Fé 1 e ut are employ’ . 30 aH 2 which i8 2180 ucts 10. (3) Average produc can be zero or negative. (4) of the for 2 units, Similarly, when 3 units of the Pe 18 7 the successive marginal products 1s 10+ b product for 3 units. In this way, from the cumulative #y ied jenoted fe wre can get total products. Ifthe marginal Pree total product when D MP,, that of the second unit by MP9.....ete-» then the n : ye, t MPa? 2 MP; (6) ww MP, = & of the input are employed will be given by MP, +M¥2 . hon average . i igher When average product inereases marginal aan is Pare than average product. When average product decreases marginal produc fi product is eau al to product. When average product remains the same margin' the average product. (BD THe LAW OF VARIABLE PROPORTIONS elp of two inputs. is producing one product with the h ft of the firm is given by g = f(x, X_) where 1S the are quantities of the two inputs. Now suppose d x, is increased continuously. Suppose that the firm ‘The production function quantity of output and x, and x) that x, remains constant at @ certain level an z ‘Then the ratio = will change and the output level will also change. The law of variable proportions shows how the output level changes due to a change in the proportion between the two factors, tis an empirical law which means that it has been derived on the basis of experience gained from different production processes. ‘The law can be stated as follows : With a given state of technology, if the quantity of one input is continuously increased, the quantity of the other input remaining the same, total out will he increase at an increasing rate but the rate of increase will ee % Ms uote ihe average Rare and the marginal product of the varie ise and then decrease, Sinc ahr ofthe variable input Seren aaa eae ae : nishing returns to factors. rthisTaw isalco knoe Several comments can be made Jaw is based on the assumption that law will be applicable only wher same, Thirdly. this law is based on the a ay of variable proportions. F'irsi. this thatthe te of technology is given. Secondly. this oa is changed, other input remaining th Possibility of varying the ratio between!"Theory of Production 49 applicable when two inputs are always used in a law has been derived not from any theoretical analysis but from practical experience. !i!'hlv. this law refers to diminishing average product and marginal product. It does not necessarily imply diminishing total product, |e") average product and the marginal product of the variable input will eventually diminish. They may first increase before they start diminishing. ° | By the law of diminishing returns we may mean either diminishing average returns or diminishing marginal returns. The law of diminishing returns is actually a special case of the law of variable Proportions. Earlier it was believed that this law would be applicable only in the case of agriculture. But from experience it has been found that this law is applicable not only in the case of agriculture but also in the case of other productive activities. Thus it is a general law which is applicable to any production process. TOTAL PRODUCT CURVE, AVERAGE PRODUCT CURVE AND MARGINAL PRODUCT CURVE Let us suppose that the production function of the firm can be written as g = fx, X) where gis the amount of output and X,, X are the amounts of two inputs X, and X,. Assume that X, is constant at the level x°,. Then the production function can be written as g = f(x,, 4°). Since 4°, is constant, this function has two variables gand x,. Here x, is the independent variable and gis the dependent variable. Hence, we can get one value of g for one value of X,. If we plot x, on one axis and gon another axis, we can represent the production function with the help of a curve. This curve is known as the total product curve of X,. This curve shows total product for different levels of employment of X, assuming that X, remains constant at 4°. If X, is constant not at x°, but at a higher or lower level then the total product curve will shift its position. If the amount of X, increases, the total product curve of X, will shift in the upward direction. But ifthe amount of X, decreases, the total product curve will shift in the downward direction. In the same way, we can assume that X, remains constant at a certain level, while X, is variable. In that case we shall get different values of gcorresponding to different values of x,. Plotting gon one axis and x, on another axis we can get the total product curve of X9. Let us now consider the probable shape of the total product curve. We know that if one input is continuously increased, the other input remaining the same, the law of variable proportions will be applicable in the production process. Under the influence of this law the average product and the marginal product of the variable input will first increase and then decrease. If we assume that the law of variable proportions holds in the production process, the total product curve will be shaped like an ‘S’. This means that the total product curve will be first increasing and convex and after a point of inflexion it will be upward-rising and concave. Finally, after reaching a maximum, the total product curve will be downward-sloping. The total product curve of X, starts from the origin. This means that when 4, is zero q is also zero, We assume that both the inputs are indispensable for inputs. Thus. the law will not be fixed proportion. Fourthly. thisqj 50 O) Higher Secondary Economics production. Now, as x, increases q will first increase at an increasing rate but later it will increase at a diminishing rate. At a point the rate of increase il be zero and beyond that, rate of increase will be negative. When the rate of increase is zero, q attains maximum and when the rate of increase is negative, 7 | decreasing. The total product curve will be first increasing and then decreasing if the law of variable proportions is applicable in the production process How the average product and the marginal product of the variable input can be measured at any point of the total product curve is shown in figure 4.1. In this figure we plot x, on the horizontal axis and qon the vertical axis In this diagram, OPQ is the total product curve. At point P on this curve, OM units of X, are employed and PM units of output are obtained. Hence at point P. we find that x, = OM and q =PM. Therefore. 7 E eM average product at any point on the total product curve is equal to the slope of the line joining that point with the 4 origin. For example, at point Q, the average product of X, will be the slope of OQ. If these lines become steeper, average product will increase. On the other hand, if these lines become flatter, average product will decrease. For example, in fig. 4.1. OQ is flatter than OP which means that average product of X, is lower at Q than at P. The marginal product of X, at any © M Input X; x) point of the total product curve is equal Wa to the slope of the tangent drawn to the total product curve at that point. Thus at point P, the marginal product of X, is given by the slope of the tangent PT. Similarly, the marginal product of X,atQ is given by the slope of the tangent QS. When the total product curve is upward rising and convex, its slope increases as we move along the curve. Hence, marginal product then increases. Again, when the total product curve is upward rising and concave, its slope decreases and marginal product also decreases. When the total product curve reaches a maximum the slope of the total product curve is zero and the marginal product is also zero. If the total product curve is downward-sloping, its slope is negative and the marginal product is also negative. The relation among the total product curve, the average product curve and the marginal product curve is shown with the help of figure 4.2. This figure has two parts. In the upper part of the figure, we have drawn the total product curve while in the lower part of the figure, we have drawn average product and marginal product curves, When x, = 0, total product, average product and marginal product are all equal to zero, Hence, all the three curves start from the origin. The total product curve is first upward-rising and beyond point D it is downward-sloping slope of OP. Thus, the Total Product ‘Total product is maximum at point D and at this point the slope of the total product curve is zero. Hence, at point D, the marginal product of X, is zero, To the left of the point D, the total product curve is positively sloped and to theTheory of Production |) 51 right of the point D, the total product curve is negatively sloped. This means that to the left of D, the marginal product of X, is positive and to the right of D, the marginal product of X, is negative, Again, the total product curve is convex up to point B and beyond B, the total product curve is ue concave. This means that the 7 slope of the total product “ec TP curve increases upto point B q=/ (x, xy) and beyond point B, the slope of the total product curve M oN s >y decreases. The point B is AP called the point of inflexion. MP At the point of inflexion, the Bw marginal product of X, is maximum. To the left of this e point, marginal product of X, 0. MN Ss ie ox is increasing and to the right of it, marginal product of X, is decreasing. The marginal Gt«: product of X, is maximum at B’ which is vertically below B. The point C on the total product curve is such that if a tangent is drawn to the total product curve at point C, it passes through the origin. This means that at point C average product is equal to marginal product, both of them being equal to the slope of OC. At point C, average product is maximum. To the left of C, average product is increasing and to the right of C, average product is decreasing. At point C’ which is vertically below C, average product is seen to be maximum and average product is equal to marginal product. It should be noted that marginal product is maximum at point B’ whereas average product is maximum at point C’. Marginal product reaches maximum before average product and when average product is maximum, marginal product is diminishing. Mcreover, when average product is increasing, marginal product is greater than average product and when average product is decreasing, marginal product is less than average product. Another point to note is that even if marginal product can be zero or negative, average product can never be zero or negative. THREE STAGES IN THE PRODUCTION PROCESS According to Cassels, when one input is continuously increased, the increase in total product passes through three different stages. The first stage is upto that point where the average product (AP) of the variable input reaches maximum. In this stage average product is increasing and marginal product (MP) is higher than the average product. In figure 4.2. the range ON represents the first stage of the production process. The second stage is that portion where AP of X, decreases but remains Positive. The second stage ends at that point where the MP of X, is zero. In figure 4.2. the range NS represents the second stage where MP of X, remains Positive but less than AP of X,. The second stage may be called the stage of diminishing returns. TP’ O- Input X;, 2266-452 0 Higher Secondary Economics The third Stage represents that nagative i.e. where the tot: range beyond S represents Stage II] The first st Portion where the MP al product of the variable factor is ‘urve is downward sloping. In figure 4.2. the of the production process. this stags Ap a a be called the stage of increasing average returns since in increasing or dente meteasing. However in the fret stage the MP of X, may be ‘Sing or decreasing, The Second stage may be called the stage of diminishing returns because in this stage both AP and MP are diminishing. The third stage _ — the stage of negative returns because the MP of X, is negative in this ge. Though there are three stages in the Production process, a rational entrepreneur will operate only in the second stage. He will not operate either in the first stage or in the third stage. The seasons for this can be explained as follows : In the third stage MP of X, is negative. This means that total product decreases when more units of the variable input are employed. Clearly, it will not be profitable to employ any input it its MP 1s negative. Again in the first stage AP of X, increases. This happens when the fixed factor is not fully utilised. Hence so long as AP increases it is profitable to employ more and more units of the variable factor. This will continue until we enter the second stage. Hence the firm will always operate in stage II of the production process. The second stage is known as the economic region whereas the first and third stages are known as uneconomic regions of the production process. Production will never, take place in the uneconomic region. GD eevstion BETWEEN AVERAGE PRODUCT AND MARGINA PRODUCT Before considering the relation between average product and marginal product, let us define average product and marginal product. The average product of any input is the total product per unit of that input. Let us suppose that by employing %, Units of the variable input X, we get qunits of total output. Then the average ‘ q : product of X, is given by a On the other hand, the marginal product . xX, a the additional output which can be obtained by employing one additional unit of. X, If the input X, is increased by Ax, units and if, as a result, total output increases by 1 ag a) Aqunits, then the marginal product of X, will be “Ax; : Thus, while average product is, marginal product is roe 1 ‘ duct and the marginal product i relation between the average pro ‘ginal pj f Tec states that when average product increases, marginal product is hand erage product ; when average product decreases, marginal product greater than average roduct and when average product is stationary, average ee a gal thaierginal prof Ii chould be noted hat heirs ee ede aes etal a increases. It only say that when averag oe roduct increases, marginal product is greater than average says that when eve product tae may increase or decrease. Similarly when raeee product. Margin i it does not mean that marginal product also decreases. It only ot decreases, producTheory of Production (@) 53 means that the marginal product is less than the average product, The marginal product may increase or decrease. The relation between average product and marginal product can be explained with the help of fig. 4.2. In this figure, it is seen that the average product of X; increases up to ON. In this range, the average product curve is upward-rising and the marginal product curve is lying above the average product curve. Beyond point N, the average product curve of X, is decreasing and the marginal product curve is lying below the average product curve. When ON units of X; are employed, average product of X, is maximum and at this level average product and marginal product are equal, both being equal to C’N. Another point to be noted in figure 4.2 is that when the employment of X, is greater than OM but less than ON, the average product of X, is increasing but the marginal product of X, is decreasing. This is perfectly possible, because when average product increases marginal product is greater than average product. Moreover, average product is never zero or negative. As the employment of X, increases the average product of X, decreases. But the average product curve never intersects the horizontal axis and never goes below the horizontal axis. On the other hand, marginal product may be zero or negative. In figure 4.2 if the employment of X, increases above OS, the marginal product of X, becomes negative. RETURNS TO SCALE If all the inputs used in the production process are changed in the same proportion it is said that the scale of the production process changes. For example, ifall the inputs are doubled the scale is said to be doubled. If all the inputs are tripled the scale of the production process is said to be tripled. When all the inputs are increased in the same proportion the output level will also increase. The rate of increase of output will depend on the nature of the returns to scale. Returns to scale refer to the relation between the change in the output level and the change in the scale of the production process. There may be three types of returns to scale—constant returns to scale, increasing returns to scale and decreasing returns to scale. If in the production process it is found that the output level changes in the same proportion in which the inputs are changed, then there is said to be constant returns to scale. Thus if doubling of all inputs results in doubling of the output level the production process is said to be subject to constant returns to scale. If the output level increases in a greater proportion than the increase in inputs, then production process is said to be subject to increasing returns to scale. Thus, in the case of increasing returns to scale, if the inputs are doubled, the output level is more than doubled. In the same way, if the output level increases at a lower proportion than the increase in inputs then there is said to be decreasing returns to scale in the Production process. Thus, in the case of decreasing returns to scale, if the inputs are doubled the output level is less than doubled. Which type of returns to scale will be applicable in the production process depends on the specific form of the production function. If the production function is written as g = f(14, x), it represents a general form. Its specific form may Vary and for different forms we can get different types of returns to scale. For