FACTOR - PRODUCT RELATIONSHIP

Factor product relationship

• The factor product relationship or the amount of resources that

should be used (optimum input) and consequently the amount
of product that should be produced (optimum output) is directly
related to the operation of law of diminishing returns.
• The objective of factor-product relationship is to determine the
optimum quantity of the variable input that will be used in
combination with fixed inputs in order to produce optimal level
of output.
• There can be three types of input-output relationships in
producing a commodity where one input is varied and the
quantities of other inputs are fixed. The nature of relationships
between a single input and a single output can either be of the
one or a combination of types given below:
i) Constant Marginal Rate of Returns or Law of Constant Returns.
ii) Increasing Marginal Rate of Returns or Law of Increasing
Returns.
iii) Decreasing Marginal Rate of Returns or Law of Decreasing
Returns.
Law of Constant Returns

The level of output increases by an equal amount for each additional

units of the variable input i.e., the relationship between the input and
the output is linear. Thus, graphically, the law of the law of constant
returns can be depicted by a straight-line production function. The
production function has the same slope throughout its entire range.
Such constant returns can occur under two situations:
a) No resource is fixed and all the inputs are varied, increased or
decreased together.
b) One or more factors of production may be fixed but they have
surplus (unutilized) capacity.
Law of Increasing Returns

• Increasing returns are said to operate when every successive

unit of the variable input results in a larger increase in the
output as compared Variable Input(X).
The resulting production function is a non-linear curve of the
type.
Law of Diminishing Marginal Returns

When one variable input used

for the production of a certain
commodity is increased relative
to other inputs, the physical
output obtained from each
added unit of the variable
input(s), tends to decline after a
certain point has been reached.
PRODUCTION FUNCTION

“It is the technical &

mathematical relationship
describing the manner & the
extent to which a particular
products depends upon the
quantities of inputs or services
of inputs used at a given level
of technology & in a given
period of time”
Assumptions of production function

1. It is associated with specified period of time.

2. The state of technology is constant during the period of time.
3. The producer is expected to use the best and the most efficient
technique.
4. The factors of production are divisible
Total physical product

• Total amount of output obtained by using different units of

inputs.
• TPP increases, tech.efficiency of fixed resources also increases.

Average physical product:

• Avg. amount of output produced by each corresponding units of
input.
• APP increases, tech.efficiency of variable resources also
increases.
APP= TPP/ INPUT LEVEL or Y/X
Marginal physical product

• Additional amount of output added by an additional unit of

input.
• Change in output as a result of change in variable input.
MPP = Change in TPP/ Change in input level.
MPP = ∆ Y /∆ X
ELASTICITY OF PRODUCTION

%- change in output / %- change input.

• Denoted by Ep.
Ep = MPP/APP.
Relationship between APP, MPP, TPP

• As long as MPP is increasing, TPP is increasing at an

increasing rate till the point of MPPmax.
• After that point TPP increases at a decreasing rate.
• When MPP=0, Then TPP=Maximum.
• -ve MPP results in decreasing TPP.
• +ve MPP results in increasing TPP
STAGES OF PRODUCTION FUNCTION

STAGE-I
• Starting point = Origin
• Ending point = MPP = APP
• TPP increases at increasing rate upto the point of inflection.
• APP is increasing throughout this stage.
• MPP increases upto the point of inflection.
• MPP>APP • EP > 1 (Throughout this stage)
• EP = 1 (At the end of this stage) where,Tech. efficiency of variable
& fixed resources increases and Fixed resources are abudant.
STAGE-II
• Starting point = APP max
• Ending point => MPP = 0
• MPP < APP but both exhibit declining trend.
• TPP increases at decreasing rate.
• EP < 1 (Throughout this stage)
• EP = 0 (At the end of this stage) where, Tech. efficiency of
variable resources decreases but of the fixed resource increase and
Variable resources are abudant.
STAGE-III
• Starting point => MPP = 0 or TPP = Max.
• TPP decreases at increasing rate.
• APP decreases throughout this stage.
• MPP becomes –ve. • EP < 0.
• Tech. efficiency of variable resources & fixed resource
decreases.
• Variable resources is in excess capacity.
OPTIMUM LEVEL OF INPUT

MVP OF INPUT:
• Additional income received from using an additional unit of
input.
MVP = Change in the total value product / Change in input
level.
Or
MVP = ∆ TR /∆ X
MIC:
• Change in the total input cost by using an additional unit of
input.
MIC = Change in the total value product / Change in input
level.
Or MIC = ∆TC / ∆ X
Optimum level of production is when,
MC = MR
MVP = MIC