PRODUCTION FUNCTION

Q= f(K, L, T)
Where,
Q= Output
f= Fractional relationship
K= Capital
L= Labour
T= Technology
 TYPES OF FACTOR INPUTS
 FIXED INPUTS:
◦ Input whose quantity remains constant irrespective
of the level of output produced by a firm. Ex – land,
building, machinary etc.

 VARIABLE INPUTS:
◦ Inputs whose quantity varies with variation in the
levels of output produced by a firm. Ex – raw
materials, labour, transport etc.
 TYPES OF PRODUCTION
FUNCTION
SHORT RUN:
◦ It means that we have to produce a particular product
for a limited period of time, for a month or a year.

◦ Two inputs- fixed and variable factors.

 LONG RUN:
◦ It means that we are planning to produce a particular
product for a longer period of time, for 20-30 years
and so.

◦ Only one input- variable factor.

 TYPES OF PRODUCT
 TOTAL PRODUCT:
◦ It is the sum of total quantity of output produced by all the units of
variable factors along with some units of fixed factors.

 AVERAGE PRODUCT:
◦ It refers to the output per unit of variable factor.
◦ AP = TP/Q

 MARGINAL PRODUCT:
◦ It refers to the additional product, which can be derived by
employing one more unit of variable factor.
◦ MPn = TPn-TPn-1
 PRODUCTION SCHEDULE
Fixed factor, Variable T.P A.P M.P
Land factors,
labour
1 1 100 100 100
1 2 210 105 110
1 3 330 110 120
1 4 420 105 90
1 5 490 98 70
1 6 490 81.6 0

When
1 TP is maximum,
7 MP
488 is zero. 69.7 -2
 LAW OF VARIABLE PROPORTION
 Law of Diminishing Return.
 It is related to short run production.
 “ as we increase the quantity of only one

input(variable) keeping other factors

constant(fixed), then the total output initially
increases at an increasing rate, then at
decreasing rate and finally at a negative rate”.
 ASSUMPTIONS
 Related to only short run production function.

 Two factors of production (fixed and variable).

 All units of variable factors are homogeneous.
 It is possible to vary proportions in which

different inputs are combined.

 The products are measured in physical

units, i.e. in quintals, tonnes etc.

 Technology remains constant.
GRAPHICAL REPRESENTATION
 STAGES OF PRODUCTION
1) The Law of Increasing Returns:

 TP increases at an increasing rate upto point F.

 MP also rises and is maximum at point F.

 AP goes on rising and when it reaches its highest

point STAGE 1 ends.
 STAGES OF PRODUCTION
2) The Law of Diminishing Return:

 From point F, TP continues to increase but at a

diminishing rate and reaches its maximum point H.

 Both MP and AP continuously fall during this stage.

 Stage ends when TP reaches its maximum point H

and here MP becomes zero.
 STAGES OF PRODUCTION
3) The State of Negative Returns:
 TP declines.

 MP is negative.

 AP is diminishing.
 CONCLUSION
 A rational producer will never produce in stage 3, where
MP is negative.

 A rational producer will also not produce in stage 1, where

MP of fixed factor is negative, as he will not be able to
make best use of fixed factor therefore losing the
opportunity of increasing the production by increasing
quantity of variable factor.

 A rational producer will produce at stage 2, where both MP

and AP of variable factors are diminishing.