What is Production Function?

The basic relationship between the factors of production and the

output is reffered to as a Production Function.
The firm’s production function for a particular good (q) shows the
maximum amount of the good that can be produced using
alternative combinations of capital (K) and labor (L)
q = f(K,L)
 TYPES OF PRODUCTION
FUNCTION
The nature of production function, ie.how output varies with change in the
quantity of inputs,depends upon the time period allowed for the adjustement of
inputs.
On this basis Production function is classified into two types:
Production function
short run production function- Time when one input (say,
capital) remains constant and an addition to output can be obtained only
by using more labour.
long run production function= Both inputs become variable
Law of Variable Proportions
Law of Variable Proportions (Short run Law
of Production)
Assumptions:
One factor (say, L) is variable and the other factor
(say,
K) is constant
Labour is homogeneous
Technology remains constant
Input prices are given

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Total Product Function (TP)

Represents the relationship between the number of workers (L) and the
TOTAL number of units of output produced (Q) holding all other factors
of production (the plant size) constant.
For a coffee shop, output would be measured in “number of coffee
cups a day”
For a steel mill, output would be measured in “tons of steel produced a
day”
Marginal Product (MP)

The additional output that can be produced by adding one more worker while holding
plant size constant.
Average Product (AP)
Represents the amount of output produced by each worker on average.
Or
Output per worker.
 TOTAL,AVERAGE AND MARGINAL PRODUCTS
SCHEDULE(CONSIDER A SMALL SANDWICH
SHOP)
NO.OF WORKERS TOTAL PRODUCT AVERAGE PRODUCT MARGINAL
PRODUCT
(L) (TP) sandwich (AP) (MP)

0 - - -
1 100 100 100
2 220 110 120 1
3 360 120 140
4 520 130 160
5 650 130 130
6 750 125 100
7 840 120 90 2
8 880 110 40
9 880 97.7 0
10 830 83 50 3
11 770 77 60
GRAPH OF LAW OF VARIABLE
PROPORTION
 Three stages of production
Stage 2
Total
Stage 1: average Output
product rising.
Stage 1
Stage 2: average
product declining (but
marginal product
positive).
Stage 3
Stage 3: marginal
product is negative, or
total product is L
declining.
RELATIONSHIP BETWEEN DIFFERENT
PRODUCTS
Between AP and MP
WHEN MP > AP,AP INCREASES
WHEN MP < AP,AP DECREASES
WHEN MP = AP,AP IS MAXIMUM
Between TP and MP
WHEN TP INCREASES AT INCREASING RATE,MP INCREASES
WHEN TP INCREASES AT DECREASING RATE,MP
DECREASES
WHEN TP IS MAXIMUM,MP IS 0
WHEN TP DECREASES,MP IS NEGATIVE
 Relationship between MP and
AP
MP 7
MP = AP, AP
doesn’t change
AP 0 and
MP above AP is max
AP
6
6
0 AP
0 MP below
AP
MP

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 ISOQUANTS
Production function with two variable
inputs or equal product curves

According to Ferguson, “ An isoquant is a

curve showing all possible combinations
of inputs physically capable of producing
a given level of output”
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An isoquant represents all those
combinations of inputs which are
capable of producing the same
level of output

An isoquant is also known as

Production-Indifference curve

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Various combination of X and Y to produce a given level of
output
Factor Factor X Factor Y
Combination
A 1 12
B 2 08
C 3 05
D 4 03
E 5 02

Each of the factor combinations A,B,C,D and E represents the same level of
production Say 100 units.

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When we plot them, we get a isoquant curve :
Y-axis

12

8
FACTOR-

6
Y

X-axis
0 1 2 3 4 5

FACTOR-X

ISOQUANT
CURVE 5
Assumptions of Isoquants
Only two factors or inputs of production
Factors of production are divisible into small
units and used in various proportions
Technical conditions of production are
not possible to change at any point of
time
Different factors of production are used in a
most efficient way
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1. Iso-Product Curves
Slope Downward
from Left to Right
2. Isoquants are Convex to the Origin.

Thus it may be observed that due to

falling MRTS, the isoquant is always
3. Two Iso-Product Curves Never
Cut Each Other:

Therefore two curves which represent two

levels of output cannot intersect each
4. Higher Iso-Product
Curves Represent Higher
Level of Output:
5. Isoquants Need
Not be Parallel to
Each Other:
6. No Isoquant can Touch
Either Axis:
An Isoquant map can be defined as the set of
isoquant curves that show technically
efficient combinations of inputs that can
produce different levels of output.
 Isoquant Curve Indifference Curve

Related with Production Related with Demand

theory. theory.

Shows various combination

of two inputs on an equal Shows the various
output. combination of two
commodities

It shows constant level of

output It shows the constant
which can be measured. level of satisfaction
which can’t be measured.
ISO-COST / EQUAL-COST LINE :-

Iso-Cost line represent the price of the factor.

It shows various combination of two factors
which the firm can buy with, given outlay.

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 Suppose a firm has Rs.1000 to spend on the two
factors X and Y.

If the price of factor X is Rs.10 and that of Y is

Rs.20, the firm can spend its outlay on X and Y or it
can spend the entire outlay on Y and buy 50 units of it
with zero units of Y or it can spend the entire outlay on
Y and buy 50 units of it with zero units of X factor. In
between, it can have any combination of X and Y.

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One can show iso-cost line diagrammatically also. The
X-axis shows the units of factor X and Y-axis the units of
factor Y. when entire Rs.1000 are spend on factor X we
get OB and when entire amount is spent on factor Y we
get OA. The straight line AB which joins point A and B
will pass through all combinations of factors X and Y
which the firms can buy with outlay of Rs.1000. The line
AB is called Iso-cost line .

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 E
Factor-

C
Y

O
B D F
Factor-X
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FC is 100 qty 5

cost per unit 100/5 = 20

FC is 100 qty 10
cost per unit 100/10 =10