AEC506

PRODUCTION RELATIONSHIPS
• Three relationships are usually defined in
production theory.
• They are:
1. Factor – product;
2. Factor-factor; and
3. Product – product relationship
FACTOR – PRODUCT RELATIONSHIP
• In factor – product relationship, an agricultural production function
can be explicitly written as :
• Y = f(X1, X2, ……………,Xn)
• This can be interpreted as : Y depends on or is a function of X1, X2,
……………,Xn

• Y represents output while X1, X2, ……………,Xn are the quantities of inputs or
resources.
• It is important to note that the quantities of output and inputs are
rates of flow per unit of time
• The above equation indicates the existence of some mathematical
function or relation between the quantity of Y output, the dependent
variable, and the quantities X1, X2, ……………,Xn , resources or factors of
production, which are the the independent variables.
• 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.
• Further questions such as, how much fertilizer to be
applied per acre? how much irrigation to be given? and so on are all
within the scope of factor – product relationship.
 ASSUMPTION
• There are various assumptions of factor-product relationships
1. Non-negativity values of inputs and outputs. This means that from Y>
=0, Xi >=0
2. I = 1,2,3,………n
3. Every possible combination of inputs is assumed to give maximum
level of output. This means that production function pre-supposes
technical efficiency
4. The production function is single valued and continuous for which
there exist first and second order partial derivatives of the output, Y
with respect to each of the input variables Xi
• 5. The production function is characterized by
i. decreasing Marginal Product for all factor-product combination
ii. Decreasing rate of technical substitution between any two
factors
iii. An increasing rate of product transformation between any two
products
• 6. The return to scale is assumed to be decreasing
• 7. The exact nature of of the firm’s production function is assumed to
be determined by a set of technical decisions taken by the producer
• 8. The parameters determining the firm’s production function are not
random variables
• In factor-product relationship, production inputs are normally
distinguished into variable and fixed inputs.
• With this in mind, our general explicit production function can be
written as:
• Y = f(X1, X2, ……………,Xn/ Xn+1, Xn+2, ……………,Xm)
• Now our inputs are defined separately
• X1 - X2= variable inputs(e.g. land and labour respectively)
• Xn+1 - Xm = s fixed input which exist only in the short-run
• Since Xn+1 - Xm are fixed for the production period, the relevant production function for
our purpose can now be re-expressed as
• Y = f(X1, X2, X3 ……………,Xn)
Concept of Product

There are three concepts of product such as: Total Product Average Product Marginal Product

Total Product • Total Product refers (TP) to the total volume of goods and services produced by a firm
during a given period of time. Where L is quantity of a factor AP is the average productivity of a factor,
MP is marginal productivity of a factor

Average Product Average Product (AP) is output (total product) per unit of a factor,
Where, i.e. APL = Q/L is total product L is quantity of a factor input

Marginal Product Marginal Product (MP) is rate of change in total product with respect to a factor.
In other words, marginal product is the addition to total product by utilizing one more unit
of variable input to the production process, keeping other factor fixed,
i.e. MPL = dQ / dL Where , dQ is change in total product dL is change in quantity of a factor input.
Derivation of the AP Curve and MP Curve From the TP Curve
Q

•
•

Total Product=TP
•

L
Q/L

Average Product of Labor=APL

Marginal Product of Labor=MPL

 Stages of production
• The stages of production answers the question, “how many
workers do we hire?” There are three stages of production: (1)
Stage I – Increasing Returns (2) Stage II – Diminishing Returns
(3) Stage III – Negative Returns
Stage 1: Increasing Marginal Returns- As the number of workers
increases, they make better use of their machinery and
resources. This results in increasing returns (or increasing
marginal products). When a firm learns that each new worker
increases output more than the last, it is motivated to hire
another worker. As a result, the firm ends up producing in the
next stage…
Stage 2: Decreasing Marginal Returns- This begins when the
sixth worker is hired and where marginal returns start to
decrease. Production keeps growing, but in smaller and smaller
amounts. Most firms operate in this stage (Stage II). This is the
stage where workers start to get in one another’s way, and the
production begins to slow.

Stage 3: Decreasing Marginal Returns- This stage occurs when

the firm hires too many workers. Since there are too many
workers, it negatively interferes with production, causing an
overall fall in output (marginal product of each additional
worker is negative).
•We can divide these
relationships into three
categories:
1. Relationship between TPP and APP
• From the above figure, we can see that APP curve is similar in shape to
TPP, this is because APP is purely
• derived from TPP.
• Where TPP is increasing at an increasing rate, APP curve is also increasing.
2. Relationship between TPP and MPP
• When TPP curve is increasing at an increasing rate, the MPP curve is
also increasing.
• When TPP curve is increasing at a decreasing rate, the MPP curve is
decreasing.
• The point at which MPP is at its maximum corresponds to the
inflection point on the TPP curve.
• Beyond the inflection point, TPP continues to increase at a decreasing
rate but MPP begins to decrease.
• Where TPP reaches its peak and has zero slope, MPP becomes zero.
• At the point where TPP curve begins to decline (point of intensive
margin), MPP is negative.
3.The relationship between MPP and APP
• When APP is increasing, MPP curve is above APP curve
(𝑀𝑃𝑃 > 𝐴𝑃𝑃)
• When APP is decreasing, MPP curve is below the APP
curve (𝑀𝑃𝑃 < 𝐴𝑃𝑃)
• Where APP curve is at its peak, both APP and MPP are
equal (𝑀𝑃𝑃 = 𝐴𝑃𝑃)
• Where MPP curve is zero, APP curve is still decreasing
but positive.
• At the point where MPP is negative, APP curve is
decreasing but still positive.
 STAGES OF PRODUCTION
• The above relationships show the three stages of production:
• Characteristic features of Stage 1
• Stage 1 ends with the extensive margin where APP equals MPP
• TPP first increases at an increasing rate and then from the point of
inflection begins to
• increase at a decreasing rate.
• MPP increases and reaches a peak and begins to decline.
• APP also continues to increase and reaches its peak where stage
terminates.
• At this stage MPP is greater than APP
• Characteristic features of Stage 2
• Stage 2 of production starts where APP is equal
to MPP.
• After this point APP is greater than MPP
• At the end of stage 2 MPP is equal to zero
• MPP is equal to or less than APP but equal to or
greater than zero.
• Characteristic features of Stage 3
• Stage 3 of production starts where MPP is equal
to zero
• In stage 3, MPP becomes negative
• Both TPP and APP continue to decrease
 FACTOR-PRODUCT RELATIONSHIPS
Input Level TPP APP MPP
0 0 0 -
1 12 12 12
2 30 15 18
3 44 14.67 14
4 54 13.5 10
5 62 12.4 8
6 68 11.33 6
7 72 10.29 4
8 74 9.25 2
9 72 8 -2
10 68 6.8 -4
 Law of Diminishing Marginal Returns
• The law of diminishing marginal returns is a theory in economics that
predicts that after some optimal level of capacity is reached, adding
an additional factor of production will actually result in smaller
increases in output.

• In economics, law stating that if one factor of production is increased

while the others remain constant, the overall returns will relatively
decrease after a certain point.
• For example: if more and more laborers are added to harvest a
wheat field, at some point each additional laborer will add relatively
less output than his predecessor did simply because he has less and
less of the fixed amount of land to work with.
 LAW OF VARIABLE PROPORTIONS
• The law of diminishing marginal returns is also referred to as the law
of variable proportions

• The law of variable proportions states that as the quantity of one

factor is increased, keeping the other factors fixed, the marginal
product of that factor will eventually decline.