Theory of Production

• Production is the process of transformation of factors

of production ( land, labour, capital, organization,
technology, raw materials etc. ) into final goods &
services.
• The process of production shows close relationship
between several factors of production and final output.
Mathematically,
Q = f(L, K, N, T, t, Rm, E…..)
Where, Q = Output, L = labour, K = Capital
N = Land, T = Technology, t = Time
Rm = Raw materials, E = Energy
 Production function
• The functional relationship between physical output and input of a firm is
known as production function.
There are two types of production function:
(i) Short-run production function:
The production function which establish relationship between output
and variable inputs assuming some other inputs constant is called short-run
production function.
Mathematically, Q = f ( L, K̅ )
Where, Q = Output, L = Labour ( Variable ), K̅ = Capital ( constant )
(ii) Long-run production function:
The production function which establish the relationship between
output and factor inputs assuming all factor inputs are variable is called
long-run production function:
Mathematically, Q = f (L,K)
Where, Q = Output, L = Labour, K= Capital
 Concept of TP, AP and MP
 Total Product ( TP ): TP is defined as the total quantity of a commodity that a firm or an
industry can produce from the application of given factors of production at a given unit of
time.
In other words, TP is defined as the cumulative value of MP in the process of production.
Mathematically,
TP = ∑MP or, TP = AP×L
Where, TP = Total Product, MP = Marginal Product
AP = Average Product, L = Units of variable factor
 Average Product ( AP ): Total product or total output divided by the quantity of
variable factors (inputs) to produce the output is known as average product.
Mathematically,
AP = TP/L Where, AP = Average Product
TP = Total Product, L = Labour
 Marginal Product (MP): MP is defined as the additional quantity to the total
quantity of a commodity produced by a firm or an industry from the application of one
more unit of variable factor.
Mathematically, MP = ΔTP/ΔL or, MP = TPn – TPn-1
Where, MP= Marginal Product, TP = Total Product,
n = Number of labour unit, ΔTP = Change in total product
ΔL = Change in units of labour
 Derivation of TP, MP and AP curves:
• Derivation of TP, AP and MP can be illustrated with the help of following
hypothetical table and figure where labour is supposed to be variable factor of
production.
Units of labour TP ( in kg ) AP ( in kg ) TP/L MP ( in kg ) ΔTP/ΔL
1 3 3 3
2 8 4 5
3 12 4 4
4 14 3.5 2
5 14 2.8 0
6 12 2 --2

 In above table and figure, TP increases in the beginning at the increasing rate when MP
becomes maximum point then increases at diminishing rate, reaches at maximum point
when MP = 0, and starts to fall along with continuous increase in one more unit of
labour.
 MP increases in the beginning but faster than AP reaches at maximum point, starts
to fall becomes zero even negative along with increase in labour.
 AP increases in the beginning but slower than MP reaches at maximum point when AP
= MP, starts to fall along with continuous increase in one more unit of labour.
……

 In above table and figure, TP increases in the beginning at the increasing rate
when MP becomes maximum point then increases at diminishing rate, reaches at
maximum point when MP = 0, and starts to fall along with continuous increase in
one more unit of labour.
 MP increases in the beginning but faster than AP reaches at maximum point, starts
to fall becomes zero even negative along with increase in labour.
 AP increases in the beginning but slower than MP reaches at maximum point
when AP = MP, starts to fall along with continuous increase in one more unit of
labour.