28TH BHADRA, 2078

GOOD MORNING DEAR STUDENTS,

WELCOME TO ONLINE SESSION OF
GRADE- XI ‘ECONOMICS’
 THEORY OF
PRODUCTION
MEANING OF PRODUCTION

• Production vaneko kehi saman utpadan garnu resources use garera or factor production
like (labour, raw materials, capital etc.)

INPUTS Processing Output

Sugarcane Sugar
In conclusion, production is process to produce goods and service using inputs.
CONCEPT OF PRODUCTION FUNCTION

• Goods banauna producer use different types of inputs or factor of production like: raw
materials, land, labour, capital, etc.
• Example; Ram le Moja banaudai chha uslai pahila 1 lakh paisa ra jagga sangai machine,
kam garne manche chaincha inorder to produce output or fine goods.
• Production Function means a mathematical equation of factor of producton;
• Q= f(L, K, La, R, T….)
• Q= amount of output------L- labor, K- Capital, La- Land, R-Raw materials, T-Technology
etc.
TYPES OF PRODUCTION FUNCTION
1. SHORT RUN PRODUCTION FUNCTION:
• In short run, some factors of production like land, machinery, buildings, tools, etc. remain
fixed but some factors of production like labor, fuel, raw material are variable. Thus, the
short run production function is the relationship between inputs and outputs when
quantities of one input are kept constant and quantities of one input is variable. It is also
known as the production function with one variable input.
• Example: Euta company ma choto time period ma owner le naya machine replace garna
sakdaina usle sakne vaneko labour matra ho jasma euta machine fixed hunxa ani labour
variable.
• Symbolically, it can be expressed as; Q=f (L, K ) where labour ‘L’ is variable.
where Capital ‘K’ is fixed.
2. LONG RUN PRODUCTION FUNCTION

• Long run is the time period that a firm changes all of its input factors. It means that in the
long run all factors of production are variable and no factor of production is fixed. Thus,
the long run production function is the relationship between inputs and outputs when all
inputs are variable. It is also known as the production function with two variable inputs.
• Example: Euta company ma lamo time period ma owner le sabai replace garna sakxa so
sabai input haru variables hunxan.
• Symbolically, it can be expressed as; Q= f (L , K) where L= Labor (Variable)
where K= Capital ( Variable)
MEANING OF TP, AP AND MP

• Total Product -Euta producer le input diyera katti total out put produce garyo
For example: Input- Labor ‘1’ gives 4 total product.
• Average Product - Total product 10 chha vane yesma 2 ota labor ko yogdan huncha tara
So, average product= 10/2= 5 1 labour = 5 per average
So, it can be calculated by dividing total product by the corresponding input.
• Marginal Product- Change of TP
 Along
with
RELATION BETWEEN TP, AP AND MP IN SHORT
increase RUN
of Labour
TP PRODUCTION
Units of
Labour (L) (TP)
FUNCTION
Total Product Average Marginal product
Product (AP= (MP= TP)
Relation
between TP
Relation
between AP
increase TP/L) and MP and MP
then
0 0 - -
becomes
constant 1 4 4 4-0=4 MP TP MP>AP= AP
and starts 2 10 5 10-4=6 Increasin MP<AP= AP
to decline 3 18 6 18-10=8 g MP=AP, AP
Increasing
max
4 24 6 24-18=6
5 28 5.6 28-24=4 Decreasing MP TP MP -ve , AP
+ve
6 30 Constant 5 30-28=2
Zero
7 30 4.3 30-30=0 MP ‘0’ TP-
Decline Negative maxm
MP is -2 negative TP starts to fall.
8 28 MP = Zero TP= 3.5 28-30= -2
30 Which means MP –ve TP-falls
maxm.
 RELATION BETWEEN
TP AND MP //// AP AND MP
• TP and MP AP and MP
1. When MP increase, TP starts to
1. When MP>AP, AP is rising.
increase
2. When MP falls, then TP starts to fall 2. When MP=AP, AP is maximum.
3. When MP zero TP becomes 3. When MP<AP, AP is falling.
maximum
4. When MP negative, TP begins to 4. MP may be positive, negative or zero
fall. but AP is always positive.
FIGURE :

• TP AP and MP

• Explanation of Figure:
X axis represents---units of labour
Y axis--------TP, AP and MP
When we pot the values of TP, AP and MP in the figure, we get TP curve, AP curve and
MP curve of labour in short run.
 LAW OF VARIABLE PROPORTION
VARIABLE- 8 STEP

1. Introduction
The law of variable proportions was propounded by economists like J.
Robinson, A. Marshall, P.A. Samuelson etc. This law is also known as
the law of diminishing returns. The law of variable proportions explains
the short run production function.
 2. STATEMENT

• According to this law, as the quantity of variable factor goes on increasing, keeping the quantity of other factor
constant, the TP first increases at an increasing rate, then increases at a decreasing rate, after that it reaches a
maximum point and begins to decline.
• According to Alfred Marshall, “ An increase in the capital and labor applied in the cultivation of land causes in
general a less than the proportional increase in the amount of the product raised unless it happens to coincide with
an improvement in art of agriculture’’.
3. RATIO OF TWO FACTORS (EXPLANATION OF
SHORT RUN PRODUCTION FUNCTION)
Suppose there are two factors used in production: Capital (K) and Labor (L). In short run, labour
only can be changed and capital remains fixed. Since, the amount of capital is fixed and the amount
of labour is variable, capital and labor can be combined in varying proportions. So, this law is also
known as the law of variable proportions.

Capital 10 10 10 10
Labour 1 2 3 4
Ratio of Labour 10/1=10 10/2=5 10/3=3.333 10/4=2.5
and Capital
4. ASSUMPTIONS
5. TABLE AND FIGURE:

STAGE 1st
a. MP=AP b. MP>AP

STAGE 2nd
a. MP=0 b.TP maximum
STAGE 3rd
MP<0
 6. FIGURE AND TABLE EXPLANATION:

A. Explanation of Table:
• The law of variable proportions is illustrated in Table 1. where,
K represent as input factor as Capital at column one, L as labour input at column two. Similarly, column three justifies
inputs (L and K) and used in varying proportion. Column four indicates TP as total production. Column 5 shows the
marginal product (MP). AP represents average product of labour which is calculated in column six.
The first, second and third units of labour reflect increasing returns their marginal products being 10,20 and 30 units
respectively. But then beginning with fourth labour, marginal product the increase in total product—diminishes
continuously and actually becomes zero with the sixth unit of labour and negative wit the seventh. Average product or
output per labour is shown in column six. It is calculated simply by dividing total product by the corresponding number
of labours.
B. Explanation of figure:
In figure 2. TP, AP and MP are shown on Y axis. Units of labour are shown on X axis. When we
plot the respective values of labour, TP, AP and MP. The MP curve is formed by the change in
total product associated with each successive units of labour.
Note that so long as marginal product is positive total product is increasing. And when marginal
product is zero, total product is at its’ peak. Finally, when marginal product becomes negative,
total product is declining. Increasing returns are reflected by a rising average product curve,
diminishing returns, by a falling marginal product. Average product also reflects the same general
increasing-maximum-diminishing relationship between variable inputs (Labour) and output as
shown by marginal product.
 7. THREE STAGES OF PRODUCTION

• 1st Stage: TP and AP are increasing. MP reaches maximum and starts to decline but remains greater than Ap.
AP reaches at its maximum and it equals to MP. Thus, stage I begins from the origin and ends when AP and
MP are equal. This stage is also called increasing returns.

• 2nd Stage: TP is increasing. Both TP and MP are declining. MP is less than AP. MP is positive. Thus, stage II
is the stage of diminishing returns from both the marginal and average product point of views.

• 3rd Stage: This stage begins from the end point of Stage II. During this stage, MP is negative. TP and AP are
declining but remains positive. Stage III starts from the sixth units of labour where MP equals zero. Similarly,
this stage is also called negative returns to factor.
 8. CONCLUSION

Finally, with the draw of table and graph the law of variable proportions is explained thoroughly. Similarly,
it is applicable in agriculture because the area of land is fixed and the number of labour or farmer is variable.

***The END of Law of Variables***

 LAWS OF RETURN TO SCALE

The law of returns to scale explains the long run production function. Both the inputs are variables, Symbolically, it can be
expressed as; Q= f ( L , K )
According to this law, the output can be increased in long run by changing all inputs by the same proportion. When all the
inputs are increased proportionately, there may be increase in output in three ways. It may increase more than proportionately, It
may increase proportionately and It may increase less than proportionately. For example if inputs are doubled, the output may be
more than double equal to double or less than double.
This kind of input-output relationship gives three law of returns to scale. (CID)
A. Increasing Returns to Scale (IRS)
B. Constant Returns to Scale (CRS)
C. Decreasing Returns to Scale ( DRS)
A. INCREASING RETURNS TO SCALE
B. CONSTANT RETURNS TO SCALE
C. DECREASING RETURNS TO SCALE
TABLE EXPLANATION:

Units of Units of Total units Total output Total output Total output MP MP MP
Labour (L) Capital (K) of inputs (TP) (TP) (TP) I C D
Increasing Constant Decreasing
1L 1K 1L+1K 200 200 200 200 200 200
2L 2K 2L+2K 500 Increasing 400 300 Increasing 300 200 100
Increasing
with with
3L 3K 3L+3K 900 Increasing 600 with Constant 375 Decreasing 400 200 75
4L 4K 4L+4K 1400 800 Ratio 425 500 200 50
Ratio ratio
Total 2000 3000 2000 1300

More than Less than

100% Equal to 100%
100% 100%

1. Increasing returns to scale: When output increases in a greater proportion than the increase in inputs, then it is
called increasing return to scale.
2. Constant returns to scale: When change in output is proportional to change in inputs it shows constant returns to
scale.
3. Decreasing returns to scale: When output increases less than proportionately to increase in inputs it is called
decreasing returns to scale.
INCREASING, CONSTANT AND DECREASING RETURNS TO SCALE
WITH FIGURE EXPLANATION:

y IRS y y
MP MP CRS MP
DRS

0 Labor and Capital x 0 Labor and Capital x 0 Labor and Capital x

In above figure, labor and capital are shown on x axis and total output on y axis.
1. Total out put is increasing with the increasing of labor and capital, the IRS curve is drawn with the help of inputs and
up warding slope line is formed.
2. Total out put is constant increasing with the increasing of labor and capital, the CRS curve is drawn with the help of
inputs and straight line is formed parallel to x axis.
3. Total out put is decreasing with the increasing of labor and capital, the CRS curve is drawn with the help of inputs and
downward sloping line is formed.
FIGURE EXPLANATION POINT:

In above figure, labor and capital are shown on x axis and total output on y axis.
1. Total out put is increasing with the increasing of labor and capital, the IRS curve is drawn with
the help of inputs and up warding slope line is formed.

2. Total out put is constant increasing with the increasing of labor and capital, the CRS curve is
drawn with the help of inputs and straight line is formed parallel to x axis.
3. Total out put is decreasing with the increasing of labor and capital, the CRS curve is drawn with
the help of inputs and downward sloping line is formed
MEANING OF ISOQUANT

An isoquant is a curve which show various amounts of combinations of two input which produce the
same /equal level of output.

Factor Labour (L) Capital Output in units

A 1
B 2
C 3
D 4
E 5
12 100
8 100
5 100
3 100
2 100
 ISOQUANT BY FIGURE

Y axis
Properties/Features of C
a
Isoquant p
1. Isoquants are downward sloping i
from left to right. a
2. Isoquants are convex to the l
origin X axis
3. Isoquants are non intersecting. Labour
4. Higher isoquant gives higher
level of output than lower
isoquant
5. Isoquants donot touch either x
axis nor y axis.
 1. INCREASING RETURNS TO SCALE:

Figure 11 shows the case of increasing returns to scale where to get equal increases in output, lesser proportionate
increases in both factors, labor and capital, are required. It follows that in the figure:
100 units of output require 3C + 3L
200 units of output require 5C + 5L
300 units of output require 6C + 6L
so that along the expansion path OR, OA > AB > BC. In
this case, the production function is homogeneous of
degree greater than one
 2. DECREASING RETURNS TO SCALE:

• Figure 12 shows the case of decreasing returns where to get equal increases in output, larger proportionate
increases in both labor and capital are required. It follows that

100 units of output require 2C + 2L

200 units of output require 5C + 5L
300 units of output require 9C + 9L
so that along the expansion path OR, OG
< GH < HK
 3. CONSTANT RETURNS TO SCALE:

• Figure 13 shows the case of constant returns to scale. Where the distance between the isoquants 100, 200 and 300
along the expansion path OR is the same, i.e., OD = DE = EE It means that if units of both factors, labour and
capital, are doubled, the output is doubled. To treble output, units of both factors are trebled. It follows that

100 units of output require 1 (2C + 2L) = 2C + 2L

200 units of output require 2(2C + 2L) = 4C + 4L
300 units of output require 3(2C + 2L) = 6C + 6L
 THANK YOU..
TO BE CONTINUED TOMORROW WITH NEW TOPIC.
**THE END THEORY OF PRODUCTION **

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