MANAGERIAL ECONOMICS

Concept of production, law of variable production

function

Submitted to: - Submitted by:-

Prof. Dr. Nischay ABHISHEK AGARWAL [2]

Kumar Upamannyu PRABAL PARASHAR [41]
ROUNAK GOREJA [47]
SEJAL GUPTA [53]
 Introduction
 Production refers to the transformation of inputs or resources into outputs of
goods and services.

 In other words, production refers to all of the activities involved in the

production of goods and services, from borrowing to set up or expand production
facilities, to hiring workers, purchasing row materials, running quality control,
cost accounting, and so on, rather than referring merely to the physical
transformation of inputs into outputs of goods and services.

 Economics offers widely accepted tools for judging whether the production
choices are least cost.
What is production function ?
 the basic relationship between the factors of production and the output is referred
to as a production function.

 the firm's production function for a particular good (Q) shows the maximum
amount of goods that can be produced is an alternative combinations of capital
(k)and labour (l)
q = f(K,L)

 A Production Function is the maximum quantity from any amounts of inputs

 Important facts about production function:
 production function is expressed with reference to a particular period of time.

 it expresses a physical relation because both input and output are expressed in physical
terms.

 production function describes a purely technological relationship between what can be

produced from a given amount of inputs depends upon the state of Technology.

 Managers must decide not only what to produce for the market, but also how to produce it
in the most efficient or least cost manner.

 Economics offers widely accepted tools for judging whether the production choices are
least cost.
 Types of production function:
On the basis of production function is classified into two types:-
1. short run production function
2. long run production function

 SHORT RUN PRODUCTION FUNCTION :

The short run production production assumes there is at least one fixed factor
input. Production Functions. The production function relates the quantity of factor inputs used
by a business to the amount of output that result.
 LONG RUN PRODUCTION FUNCTION:
Long run production function refers to that time period in which all the inputs of the firm are
variable. It can operate at various activity levels because the firm can change and adjust all the
factors of production and level of output produced according to the business environment.
Law of variable proportion
 In the short-run the level of production can be changed by changing the factor
proportions. This law examines the production function with on factor variable,
keeping the other factors quantities fixed.

 The law explains the short-run production function. When the quantity of one
input is varied, keeping other inputs constant, the proportion between factors
changes. When the proportion of variable factors increases, the total output does
not always increase in the same proportion, but in varying proportion.
 Assumptions of the law:
 Only one factor is variable while others are held constant.

 All units of the variable factor are homogeneous.

 There is no change in Technology.

 It is possible to vary the proportions in which different inputs are

combined.

 The products are measured in physical units, i.e., in quintals, tonnes etc.
8

Total product (TP):

 It refers to the total volume of goods produced during a specified period of time.
 Total product (TP)can be raised only by increasing the quantity of variable factors employed in
production.

Average product(AP):
 Average product can be known by dividing total product by the total number of units of the
variable factor.
 TP/Q Eg- 450/5=90

Marginal product(MP):
 It is output derived from the employment of an additional unit of variable factor unit.
 The rate at which total product increases is known as marginal product.
 Addition to the total product resulting from a unit increase in the quantity of the vari able
factor.
Relationship between AP and MP:

 When AP rises as a result of an increase in the quantity of variable

input, MP is more then the average product.

 When AP are maximum then MP is equal to AP. The MP curve cuts

the AP curve at its maximum.

 When AP falls as a result of decrease in quantity of variable input,

MP is less than the AP.
Production schedule and Graph:
Stages of law of variable proportions

 1 stage:
It is called law of increasing return. In this stage TP increase with increasing rate and MP increases
and reaches maximum. Point lying on TP curve is called point of inflexion. It is that point where
TP change it slope and MP is maximum. This stage is called law of increasing return because MP
is increasing.
 2 stage:
It is called law of diminishing return. At this stage TP increase with decreasing rate and become
constant and maximum and MP reduces become zero. This is know as law of diminishing return
because MP is reducing.
 3 stage:
This stage is called law of negative return. At this stage TP reduces and MP become negative.
 Conclusion

 Production function is simply a catalogue of production possibilities.

 It is an engineering concept and since money prices do not appear in it, it merely
depicts the physical relationship between the output and input.
 A production function specifies the maximum output that can be produced with a
given set of inputs. In order to achieve maximum profits the production.
 Production function describes a purely technological relation because what can be
produced from a given amount of inputs depends upon the state of technology.
Thank you