Production Analysis:

Dr.Meda Srinivasa Rao,

Professor, FMS,
Marwadi University
 Offshoring India
• Transferring activities/ ownership of a
complete business Process to a different
country
• Build a global team in another country
• Two ways offshoring
• Product offshoring: Ford Motor company
• Service offshoring: Micro soft , American
Express
 Introduction
• In the supply process, households first offer the
factors of production they control to the factor
market.

– The factors are then transformed by firms

into goods that consumers want.
– Production is the name given to that
transformation of factors into goods.
 The Role of the Firm
• A key concept in production is the firm.
• The firm is an economic institution that transforms
factors of production (inputs) into consumer goods
(output, quantity supplied).
• A firm:
– Organizes factors of production.
– Produces goods and/or services.
– Sells goods it produces to individuals
 The Role of the Firm
• A firm:
– Organizes factors of production.
– Produces goods and/or services.
– Sells goods it produces to individuals.
 Concept of production
It is a process of undertaking any alteration
It is the Transformation of goods into another good
It involves the Specification of the commodity
In terms of its
Size,
shape,
quality,
content,
form and
location etc.
It includes the use of scarce resources to produce
goods and services that are able to satisfy some
consumer needs.
 Production Meaning
• “Presenting an item for sale, whether the
item could be tangible or intangible good”

• Tangible goods could be presented for

sale through either manufacturing or just
trading in them
• Intangibles includes
• Transportation: wheat from Haryana to
Kerala
• Storage: Buy at the time of harvest when
its price is low and sell it at a latter date
when its price is higher
• Packaging : Firm procure wheat from
market and convert into wheat flour and
then pack it in bags under their brand
name are also producers of wheat
 Definitions of Production
• Production is associated with process
undertaking any alteration or
transformation of goods or services into
another good or service
• Peterson & Lewis
• Production involves any use of scarce
resources to produce goods and services
that are able to satisfy some consumer
needs Dholakia and Oza
 Significance of Production
• How much to produce
• What combination of factors of production
• Different possible inputs to obtain same
level of output
• Decision to expand or contract of output
based on seasonality
• Factors allocation
• Upgrade the factors productivity
• Altering sources of factors
• Decisions relating to buy or make
 Production Problem
• To determine how much output to produce
• What combination of factors to employ to
that output most efficiently
 Production function
• It expresses the Technological or engineering
relationship between the output of a good and the
inputs used in the production
• G.S.Gupta
• It represents the maximum possible output
obtainable under the present state of knowledge
from a given combination of inputs
Dholakia and Oza
• The maximum rate of output, per unit of time
obtainable from a given rate of capital and labor
input . Peterson and Lewis
 Production function
• Q= f( Ld, L, K, M,T)
Where
Q= output in physical units of good X
Ld = Land units employed in the production of Q
L= Labour employed in the production of Q
K= capital employed in the production of Q
M = Managerial units employed in the production of Q
T= technology employed in the production of Q
 Production function for
convenience in short run
• Q= f(L,K)
Where
Q = output of good x
L = Land units employed in production of Q
K= capital employed in the production of Q
Production function classification
• The production function can be divided into
i) the short run
ii) The Long run
 Short run and long run meaning
• Short run is the period
during which at least one of the factors of
production available in fixed quantity
• Long run the period
which all the factors are available
what ever be quantity,
no constraint like in the short run
 Production analysis in Short run

• we concentrate on short-run production

analysis in which one of the factors is
fixed.
 Production Analysis in short run
Assume only Two factors of production
where is K (capital) is fixed

Number of Total Marginal Average

workers output product product

0 0 —
Increasing
1 4 4 4 marginal returns
2 10 6 5
3 17 7 5.7
4 23 6 5.8 Diminishing
5 28 5 5.6 marginal returns
6 31 3 5.2
7 32 1 4.6
8 32 0 4.0 Diminishing
9 30 -2 3.3 absolute returns
10 25 -5 2.5
 Different concepts
Production Function in the short run
• Total Physical product: (TPP)
Where the total output of quantity is all about
additional output
when more and more labor is employed
which is variable and
capital (k) remains fixed
 Continue…….
• Marginal Physical product (MPP)
• the additional output that is produced
from an additional worker employed,
• with other inputs remaining constant.
• Change in Total Output/
• Change in one additional worker
 Continue….
• Average Physical product (APP)
• It is nothing but
• total output divisible by the Number of
workers
• Total output
• No.of workers
 Short run –production-Different stages
Analysis
• First stage:
In the beginning, as more and more labour is used,
• fixed capital utilizes better and more efficiently than before,
Thereby output increases at an increasing rate,
• and this continues until optimum utilization of fixed capital is
achieved
• Second Stage:
After that new labour finds that fixed capital is inadequate and
hence increment in output is at a diminishing rate
• Third Stage:
Eventually, labour input becomes so much that there is no work for
new labour and so they disturb earlier labour from carrying out
their work thereby leading to a decrease in total output
Three stages in production analysis in short run:
Total Physical Product :

1. increasing total output at an increasing rate

2. Increasing total output at a decreasing rate

3. Decreasing total output at an increasing rate

 The Marginal Physical Product
• initially it increasing as input increases .
• Then it diminishing as additional labour
employed
• Finally, it is negative even further
increases employing additional labour.
 Average Physical Product
• Initially it increases as increase in labour
input
• Latter it is started diminishing and
continuous to diminishes
• but must always be greater than zero
 The Law of Diminishing Marginal
Productivity
• The law of diminishing marginal productivity
• states that
• as more and more of a variable input is
added to an existing fixed input,
• after some point the additional output
• from the additional variable input will fall.
 Graphical representation of
Production Function in short run
Diminishing Diminishing Diminishing Diminishing
32 marginal absolute marginal absolute
7
30 returns returns returns returns
28
26 6
24
22 TPP 5
20
Increasing
18

Output per worker

4
Output

marginal
16 returns
14 3
12
10
2
8
APP
6
4 1
2
0 0
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Number of workers Number of workers MPP
(a) Total Physical product (b) Marginal and average physical product
Stage TPP MPP APP
I Increases at Increases and it Increases but
increasing rate reaches to its slower than MPP
maximum

II Increases at a Starts Starts

diminishing rate diminishing and diminishing
and becomes becomes equal to
Maximum zero

III Reaches it Keep on declining Continues to

maximum become and becomes diminish but must
constant and negative always be greater
then started to than zero
declining
In practice

The first stage is short

the second stage is long
the third stage never entertained
by entrepreneur
The above reason the of variable
returns is more commonly known
as Law of diminishing returns.
 Long run Production function

Long run the period which all the

factors are available what ever be
quantity, no constraint like in the short
run
whatever the quantity of capital or
workers can employ no constraint like
short run
The long-run production function has
three variables, Labour, capital, and output
and thus need a three-dimensional diagram,
which is complicated to present on a single
figure ( curve)
Alternatively, it can be plotted on the two-
dimensional diagram, but with a family of
production curves, one for each production level
Two selected levels of production Q=91 AND
122
 Long run production function –
A case study
Lab Capital (K)
our
(L)

0 1 2 3 4 5 6 7 8 9 10
0 0 0 0 0 0 0 0 0 0 0 0
1 0 5 15 35 47 55 62 61 59 56 52
2 0 12 31 49 58 66 72 77 75 74 71
3 0 35 48 59 68 75 82 87 91 89 81
4 0 48 59 68 72 84 91 96 99 102 101
5 0 56 68 76 85 92 99 104 108 111 113
6 0 55 72 83 91 99 107 112 117 120 122
7 0 53 73 89 97 104 111 117 122 125 127
8 0 50 72 91 100 107 114 120 124 127 129
9 0 46 70 90 102 109 116 121 125 128 130
10 0 40 67 89 103 110 117 122 126 129 131
 Iso Quant Schedule
It is a schedule of different combinations of factors of production yielding the same quantity of output

Q=91 Q=122

Point L K Point L K

A 8 3 P 10 7

B 6 4 Q 7 8

C 4 6 R 5 10

D 3 8
Points to be remember in Long run Production
Analysis
THERE ARE 4 ALTERNATIVE WAYS FOR THE
PRODUCTION OF 91 UNITS AND
3 ALTERNATIVE WAYS FOR PRODUCING 122 UNITS
IT IMPLIES THAT
1. THERE IS SUBSTITUTABILITY BETWEEN FACTORS
OF PRODUCTION
2. LABOUR INTENSIVE PROCESS CHARACTERIZED BY A
COMBINATION OF A & P
3. IF THE FIRM CAN USE CAPITAL INTENSIVE
PRODUCTION PROCESS CHARACTERIZED BY A
COMBINATION OF D AND R

4. MIX OF BOTH CHARACTERIZED BY B/C AND Q

 ISO QUANTS
Iso Means Equal
Quants Means Quantity
Isoquants Means Equal Quantity
Curves
An isoquant
It derived from the Greek words iso and quant
The meaning is equal and the quantity.
It is a line drawn through the set of points at
which the same quantity of output is produced
while changing the quantities of two inputs .
Iso quants

capital

Q=122
Q=91

Labour
The properties of Iso-product curves

1. SLOPE DOWNWARD FROM LEFT TO RIGHT

2. ISOQUANTS ARE CONVEX TO THE ORIGIN

3. TWO ISO-QUANT CURVES NEVER CUT EACH OTHER

4. HIGHER ISO-PRODUCT CURVES REPRESENT HIGHER

LEVEL OF OUTPUT
5. NO ISOQUANT CAN TOUCH EITHER AXIS
Return to scale / Economies of Scale
IN THE LONG RUN

THE SCALE OF PRODUCTION INCREASES

BECAUSE ALL INPUTS ARE VARIABLE

BUT IF FOCUSES ON

THE RELATIONSHIP BETWEEN INPUT AND OUTPUT

QUANTITIES
Three variants of Returns to scale
1. INCREASING RETURN TO SCALE: (IRS)

IF OUTPUT INCREASES MORE THAN THAT OF

PROPORTIONAL CHANGE IN INPUTS,

2. CONSTANT RETURN TO SCALE: (CRS)

IF OUTPUT INCREASES SIMILAR TO THAT OF
PROPORTIONAL CHANGE IN INPUTS

3. DECREASING RETURN TO SCALE: ( DRS)

IF OUTPUT INCREASES LESS THAN THAT OF
PROPORTIONAL CHANGE IN INPUTS
Cobb Douglas Production function
It was developed by Charles Cobb and Paul Douglas
It relates to output in American Manufacturing Industries from 1899-
1922
It is widely used the relationship between the amount of two inputs,
and the amount of output
Here Labour and Capital are inputs
a 1-a
Q =A L K
where Q= Ouput
A= constant value- total factor productivity ( It measures
the change in output that is not the result of the
inputs
L= Labour units employed in the Production of Q
K=Capital units employed in the production of Q
a , 1-a = Exponents
‘a’ measures the responsiveness of output to the % change in
Labour units
1-a measures the responsiveness of output to the % change in
Capital Units.
This is homogenous function means a and 1-a add up to ONE
Explanation of Cobb Douglas function
a 1-a
Q =A L K

0.75 0.25
Q = 1.0 L K

0.75 and 0.25 measure the response of output to %change in

Labour and capital Respectively
It means
1% change in Labour units, Capital remain constant, is associated
with a 0.75 % change in output.
1% change in capital units, Labour remains constant, is associated
with a 0.25 % change in output.

It is a constant return to scale. It means a change of output in the

proportion to a change in input.
R square ie., the coefficient of determination is 0.94
it means 94% of variations on dependent variable were accounted
for variations of L and K