Production Function with one

and two variable inputs

Presented by :-
SAKET DOKANIA
 What we are going to cover?
1. Production Function
2. Production function with one variable
i. Total ,Average and Marginal physical products
ii. Law of dimishing returns
3. Production function with two variable inputs
i. Isoquants
ii. Marginal rate of technical substitution
iii. Properties of Isoquants
 Production Function
• We will be discussing the supply side of the
pricing of products
• The theory of production provides a formal
framework to help the managers of firm in
deciding how to combine various inputs
most effectively to produce a desired output
of a product
Production Function With one variable
factor

Algebraically , production function can be written as

 Labour Total Product Marginal Product Average Product Qutput Elasticity

(i.e no of workers) (TP) (MP) (AP) of Labour

L Q   Q/L MP/AP

1 80 80 80 1.00

2 170 90 85 1.06

3 270 100 90 1.11

4 368 98 92 1.07

5 430 62 86 0.72

6 480 50 80 0.63

7 504 24 72 0.33

8 504 0 63 0.00

9 495 -9 55 -0.16

10 480 -15 48 -0.31

 Total Product Curve of Labour

600

500 504 504 495

480 480
430
400
368
Total Physical Product(Q)

Series1
300
270 Series2
200
170
100 80
0 0 1 2 3 4 5 6 7 8 9 10
Labour(L)
 Total Product
• Shift in Total Product Curve
 Average Product
• Deviation of Average
Product from the total
product

Marginal Product
Qutput Elasticity of an input
 Production with
One Variable Input (Labor)

The
The Law
Law of
of Diminishing
Diminishing Marginal
Marginal Returns
Returns

• As the use of an input increases in equal

increments, a point will be reached at which
the resulting additions to output decreases
(i.e. MP declines).
 Production with
One Variable Input (Labor)

The
The Law
Law of
of Diminishing
Diminishing Marginal
Marginal Returns
Returns

• When the labor input is small, MP increases

due to specialization.

• When the labor input is large, MP decreases

due to inefficiencies.
 Production with
One Variable Input (Labor)

The
The Law
Law of
of Diminishing
Diminishing Marginal
Marginal Returns
Returns

• Can be used for long-run decisions to

evaluate the trade-offs of different plant
configurations
• Assumes the quality of the variable input is
constant
 Production with
One Variable Input (Labor)

The
The Law
Law of
of Diminishing
Diminishing Marginal
Marginal Returns
Returns

• Explains a declining MP, not necessarily a

negative one
• Assumes a constant technology
Production function with
two variable inputs
Factor Combination to produce a
given output

Factor Combinations Labour Capital

A 1 12

B 2 8

C 3 5

D 4 3

E 5 2
 Isoquant

14
12
10
Capital

8
6
4
2
0
1 2 3 4 5
Labour
 Production Function for Food
Labor Input

Capital Input 1 2 3 4 5
1 20 40 55 65 75
2 40 60 75 85 90
3 55 75 90 100 105
4 65 85 100 110 115
5 75 90 105 115 120
 Production with Two Variable Inputs (L,K)
Capital
per year 5 E The
The Isoquant
Isoquant Map
Map

4
The isoquants are derived
from the production
function for output of
3
A B C of 55, 75, and 90.

2
Q3 = 90
D Q2 = 75
1
Q1 = 55
1 2 3 4 5 Labor per year
 Marginal Rate of Technical
Substitution

Factor Combinations Labour Capital MRTS of L for K

A 1 12  
B 2 8 4
C 3 5 3
D 4 3 2
E 5 2 1
Diminishing Marginal Rate of
technical Substituion
 Properties of Isoquants
I. Isoquants slope downward from left to
right.
II. No two Isoquants can intersect each
other.
III. Isoquants are convex to origin .
Isoquants When Inputs are Perfectly
Substitutable

Capital
per A
month

C
Q1 Q2 Q3
Labor
per month
 Production with
Two Variable Inputs
Perfect
Perfect Substitutes
Substitutes

• Observations when inputs are perfectly

substitutable:

1) The MRTS is constant at all points on the

isoquant.
 Production with
Two Variable Inputs
Perfect
Perfect Substitutes
Substitutes

• Observations when inputs are perfectly

substitutable:

2) For a given output, any combination of

inputs can be chosen (A, B, or C) to generate
the same level of output (e.g. toll booths &
musical instruments)
 Fixed-Proportions
Production Function
Capital
per
month

Q3
C
Q2
B

K1 Q1
A

Labor
per month
L1
 Production with
Two Variable Inputs
Fixed-Proportions
Fixed-Proportions Production
Production Function
Function

• Observations when inputs must be in a fixed-

proportion:

1) No substitution is possible.Each
output requires a specific amount of each
input (e.g. labor and
jackhammers).
 Production with
Two Variable Inputs
Fixed-Proportions
Fixed-Proportions Production
Production Function
Function

• Observations when inputs must be in a

fixed-proportion:

2) To increase output requires more

labor and capital (i.e. moving from A
to B to C which is technically
efficient).
Linear Homogeneous Production
function
COBB-DOUGLAS PRODUCTION
FUNCTION
 Essential Features of Cobb-douglas
Production Function
• Average Product of Factors in cobb-douglas
Production Function
• Marginal Product of factors and Cobb-
Douglas Production Function
• Cobb-Douglas Production Functionand
Marginal rate of Substitution
• Cobb-Douglas Production Function and
Elasticity of substitution
• Cobb-Douglas Production Function and
returns to scale
• Cobb-Douglas Production Function and
Output elasticities of factors
• Cobb-Douglas Production Function and
Euler Theorem
• Cobb-Douglas Production Function in
extended form.
Thank you