Production Function

Production in the short run and long run

Production- transformation of inputs into output(s).
Production function- technological relationship between
quantities of inputs that a firm uses and the output that it
produces, given current knowledge about technology and
organization.
Production function with 2 inputs can be expressed as
Q= f(K,L) and that with 4 inputs in general as Q=f(K,L,E,M)
short run: a period of time so brief that at least one factor of
production is fixed.
fixed input: a factor that cannot be varied practically in short
run.
variable input: a factor whose quantity can be changed readily
during the relevant time period.
long run: lengthy enough period of time that all inputs can be
 Short-run production function
(Law of variable proportions)
Assumptions: technology is given and constant, variable factor
units are homogeneous, operates in the short run.
Assume a production function with 2 inputs, q= f(K,L)
one variable input: Labor (L)
one fixed input: Capital (K)
thus, firm can increase output only by using more labor.
Total Product(TP)- total amount of output produced during
some period of time by all the inputs that the firm uses.
- TP first increases at an increasing rate and then increases at a
diminishing rate.
Average Product(AP)- total product per unit of the variable
input used.
APL=TP
L
- AP rises initially and then falls with labor.
Marginal Product(MP)-change in the total product
resulting from the use of one more(or one less) unit of the
variable input.
Or change in total output, q, resulting from using an extra
unit of labor, L = 1, holding the other factor (K) constant .
MPL = q
L
first rises and then falls.
MP reaches its maximum at a lower level of labor
than does AP.
MP=AP only when AP is maximum.
 Law of variable proportions states that if more and
more units of a variable factor are applied to a given
quantity of fixed factor, the total product initially
increases at an increasing rate and then increases at a
diminishing rate and eventually diminishes.
 Quantity of Total Average Marginal Stages of
Labor(L) Product(TP) Product (AP) Product (MP) Production
1 10 10 10 I
2 30 15 20 I
3 60 20 30 I
4 80 20 20 I
5 95 19 15 II
6 108 18 13 II
7 112 16 4 II
8 112 14 0 II
9 108 12 -4 III
10 100 10 -8 III
Stage I(stage of increasing returns)-
Stage III(stage of negative returns)-
TP,AP,MP increases. MP>AP
TP decreases, AP continues to
TP increases at an increasing rate.
decline but positive, MP becomes
ends where AP is maximum and MP=AP.
negative.
Stage II(stage of diminishing returns)-
TP increases, AP and MP decreases but positive.
TP increases at an decreasing rate. MP<AP
ends where TP reaches maximum and MP is zero.
 TP, AP and MP
120

100

80 I II III
60
TP
40

20

0
0 2 4 6 8 10 12

35

30

25

20

15 AP
10 MP

0
0 2 4 6 8 10 12
-5

-10
 Returns to Scale- Production in the long run

All factors are varied in the long run.

Returns to scale deals with changes in output when all factors
or inputs are changed in a given proportion.
Three phases of returns to scale
1. Increasing returns to scale- the increase in all factors in a
given proportion lead to a more than proportionate increase
in output.
- economies of scale, specialization of labor, superior
machinery
2. Constant returns to scale- if all factors are increased in a
given proportion, output increases in the same proportion.
3. Decreasing returns to scale- the increase in all factors in a
given proportion leads to a less than proportionate increase in
output.
- diseconomies of scale
 Scale Total Marginal Returns to Scale
Product Product
1 Labor + 2 Land 4 4
2 Labor + 4 Land 10 6 Increasing Returns
3 Labor + 6 Land 18 8 to Scale
4 Labor + 8 Land 28 10
5 Labor + 10 Land 38 10 Constant Returns
6 Labor + 12 Land 48 10 to Scale
7 Labor + 14 Land 56 8 Decreasing Returns
8 Labor + 16 Land 62 6 to Scale
MP

12 Constant returns
to scale
10
8
6
4
2

0 1 2 3 4 5 6 7 8 Scale