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Production function and returns to a factor

INTRODUCTION
production function, in economics, equation that
expresses the relationship between the quantities of
productive factors (such as labour and capital) used
and the amount of product obtained. It states the
amount of product that can be obtained from every
combination of factors, assuming that the most
efficient available methods of production are used.
The production function can thus answer a variety of
questions. It can, for example, measure
the marginal productivity of a particular factor of
production (i.e., the change in output from one
additional unit of that factor). It can also be used to
determine the cheapest combination of productive
factors that can be used to produce a given output.

NEED AND OBJECTIVE

Why do we need production function?

Firms use the production function to determine how
much output they should produce given the price of
a good, and what combination of inputs they should
use to produce given the price of capital and labor.

What is the objective of production function

The objective of the study of production function is
concerned to minimize the cost of production for
producing a given level of output or to maximize output
for a given level of cost.

CONCEPT
Production is a process whereby some goods and services,
called inputs are transformed into other goods and services
called output. The production function refers to the
relationship between the input of factor services and the
output of the resultant product. The production function is
based on the idea that the amount of output in a production
process depends upon the amount of inputs used in the
process.
Halcrow defines production function as follows:
“Production function is the technical relationship
between inputs & output indicating the amount of
output that can be produced with each and every set
or combination of the specified inputs”.
;Production function can be studied in two ways
depending upon the nature of factors involved as:

1.Short-Run Production Function

 2.Long-Run Production Function

PRODUCTION ANALYSIS

Production analysis is basically concerned with the

analysis in which the resources such as land,labour,and
capital are employed to produce a firms final product. To
produce these goods the basic inputs are classified into
two divisions;
Variable inputs
Inputs that change or are variable in the short run or
long run are variable inputs
Fixed inputs
Inputs that change constantly in the short term are fixed
inputs.
Short run and long run production functions
 The short-run production function defines the relationship
between one variable factor (keeping all other factors fixed) and
the output. The law of returns to a factor explains such a
production function.

For example, consider that a firm has 20 units of labour and 6

acres of land and it initially uses one unit of labour only
(variable factor) on its land (fixed factor). So, the land-labour
ratio is 6:1. Now, if the firm chooses to employ 2 units
of labour, then the land-labour ratio becomes 3:1 (6:2).

The long-run production function is different in concept from

the short run production function. Here, all factors are varied in
the same proportion. The law that is used to explain this is
called the law of returns to scale. It measures by how
much proportion the output changes when inputs are changed
proportionately.

METHODOLOGY
Production function can be represented in various form. It can
be represented by tables, graphs,mathematical equations,
showing the maximum quantity of output that a firm can
produce
per period of time with various combinations of factors (i.e., inp
uts). Production function can berepresented by input-output
tables

FACTORS AFFECTING THE STUDY

Production function can differ with:
 
1.Period of time- production function expresses a flow of
inputs resulting in a flow ofoutput in a specific period of
time.
 
2.Technology- when there is advancement in technology,
the production function changeswith the result that the
new production can yield grater flow of output from the
giveninputs, or smaller quantities of inputs can be used for
producing a given quantity ofoutput.

PRODUCTION FUNCTION WITH ONE VARIABLE

FACTOR

The production function when the quantities of some

inputs are kept constant and the quantity of one input (or
quantities of few inputs) are varied. The concept of returns
to a variable factor is relevant for the short run as capital,
machines, land remain fixed and factors such as labor, raw
materials are increased to expand output. The short-run
two factor production function can be written as:
Q= f(L,K)

=DIFFERENT PHYSICAL PRODUCTS:

1. Total Product (TP): The total product of a variable factor
is the amount of total output produced by a given quantity
of the variable factor, keeping the quantity of other factors
such as capital, fixed.
2. Average Product (AP): Average product of a variable
factor (labor) is the total output

(Q) divided by the amount of labor employed with a given

quantity of capital (fixed factor) used to produce a
commodity.

Average physical product of labor (AP) Q(total

output)/L(quantity of labor)
3. Marginal Product (MP): It means the contribution of
extra unit of output from extra unit of variable.

MP= dQ/dL

ELGEBRAIC EXPRESSIONS OF PHYSICAL

PRODUCTS
TP = AP.L OR,
TP= summation MP
MP= TPn-TPn-1
AP=TP\L

TABULAR ILLUSTARTION OF MP TP and ap

THE LAW OF VARIABLE PROPORTIONS OR
THE LAW OF DIMINISHING MARGINAL
PRODUCT

The law of variable proportions or law of

diminishing proportion states, "As equal increments
of one input are added; the inputs of other
productive services being held constant, beyond a
certain point the resulting increments of product will
decrease, i.e., the marginal products will diminish."

According to Samuelson,

.."an increase in some inputs relative to other fixed

inputs will, in a given state of technology, causes
output to increase; but after a point the extra output
resulting from the same additions of extra inputs will
become less and less."

Law of variable proportion examines the production

function with one factor variable, keeping the
quantities of other factors fixed and refers to the
input-output relation when output is increased by
varying the quantity of one input.

GRAPHICAL OR GEOMETRICAL
REPRESENTATION OF THE LAW
………………………………………………………………………….

THREE STAGES OF PRODUCTION

STAGE1:
In stage 1, fixed factor is more than variable factor
relatively. Average product curve continue torise
through the first stage. Therefore, it is called the
stage of increasing return. Since average physical
product rises throughout the stage 1, no rational
producer will stop the production at theend of stage
1. Therefore, he will produce till stage 2.
STAGE2:
In stage 2, marginal physical product and average
physical product keep on decreasing, therefore,it is
called the stage of diminishing returns. Fixed factor
are scarce and variable factors are in

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abundant, thus variable factor could not be utilized.
Stage 2 is very crucial and important becausethe
firm will seek to produce in its range.
STAGE3:
In stage 3, total product declines and therefore the
total product curve slopes downward. In thisstage,
variable factor is too much relative to the fixed
factor. This state is called the stage ofnegative
returns since the marginal product of the variable
factor is negative during this stage.

CAUSES OF INCREASING RETURNS TO A

FACTOR
There are three important reasons for the operation of increasing
returns to a factor:

1. Better Utilization of the Fixed Factor:

In the first phase, the supply of the fixed factor (say, land) is too
large, whereas variable factors are too few. So, the fixed factor is
not fully utilised. When variable factors are increased and
combined with fixed factor, then fixed factor is better utilised and
output increases at an increasing rate.

2. Increased Efficiency of Variable Factor:

When variable factors are increased and combined with the fixed
factor, then former is utilised in a more efficient manner. At the
same time, there is greater cooperation and high degree of
specialization between different units of the variable factor.

3. Indivisibility of Fixed Factor:

Generally, the fixed factors which are combined with variable

factors are indivisible. Such factors cannot be divided into smaller
units. Once an investment is made in an indivisible fixed factor,
then addition of more and more units of variable factor, improves
the utilisation of fixed factor. The increasing returns apply as long
as optimum level of combination between variable and fixed
factor is achieved.

CAUSES OF DIMINISHING RETURNS TO A

FACTOR
Causes of diminishing returns
At a certain point in a production process, a business' productivity starts to decline.
Companies look for the signs when efficiency starts to decrease to be able to implement
preventive action plans. The business may stop its production or re-evaluate its
operations and pricing strategy. Diminishing returns may result from the following:

 Fixed factors of production: The law of diminishing returns happens

because some production factors remain fixed. An increase in
production rate results from the effective increase of all production
factors, which doesn't happen because of the fixed production factors.
 Lower productivity levels: In some instances, hiring additional
manpower proves to be counterproductive. Some businesses function
effectively with a certain number of employees and adding more may
create a chaotic environment because of overcrowding or decrease
productivity because of excessive socialization.
 Limited demand: Sometimes, while a business hires an additional
employee to satisfy a product demand, the job may not cover the full
output capacity that the employee can deliver. For example, an
employee that can deliver ten units of finished goods may only produce
five units if this is the demand, resulting in diminishing returns.
 Optimum production: If all the production factors work together
perfectly, optimum production takes place. After this point, the addition
of more and more variable factors results in less efficient combinations
with fixed factors, lowering efficiency and leading to diminishing returns.
 Negative impact on the work environment: Adding more employees
may lower efficiency and productivity because of overcrowding, which
creates an uncomfortable atmosphere. Adding new equipment may also
 result in unintended consequences, such as a change in the production
temperature, which may affect the quality of other products in
production and lead to a decrease in returns.
 Short term: The law of diminishing marginal returns only happens in
the short term. This results from the fact that all factors are variable in
the long term, which means that they may adjust and work more
efficiently together and produce better returns after a certain point in
time.

ASSUMPTIONS OF THE LAW

 The diminishing returns only happen in production settings or functions.
 All technology involved remains constant and the whole production
process stays the same.
 All other production factors remain constant and homogeneous and only
one increases.
 The event only occurs in the short term.

POSTPONEMENT OF THE LAW

Refer to Pg 202 bottom paragraph

Relationship between tp mp ap
RELATIONSHIP BETWEEN TP AP AND MP

The diagram or curve shows three stages of production which are as follows:

 Stage I: MP > 0, AP is rising. Thus, MP > AP. This is increasing stage;
 Stage II. MP > 0, but AP is falling. Thus, MP < AP, but TP is increasing
because MP > 0. This is diminishing stage.
 Stage III: MP < 0 and TP is falling. This is negative stage.

CONCLUSION
To conclude, the following findings are found:

 When TP increases at an increasing rate, MP increases.

 When TP increases at diminishing rate, MP declines
 When TP is maximum, MP is Zero
 When TP begins to decline, MP becomes negative
 When MP > AP, this means that AP is rising
 When MP = AP, this means that AP is maximum
 When MP < AP, this means that AP is falling

RELEVANCE OF THE STUDY IN CURRENT

SCENARIO
Appropriate knowledge about the usage of the concept of
production function can be of great value in various decision-
making processes. The present study highlights the concept of
production function,its measurement and a detailed analysis of its
applicability. This study tries to fill the gaps in literature by
gathering suggestions from grass root level regarding its efficiany
and impact on our economy.

CONCLUSION
Some important problems encountered in the production
function studies are very important Production function
theoretically includes only technically efficient
combinations of inputs and output, the actual data used
for measurement of production function may not actually
represent the efficient input combinations. This may cause
some error in the estimation of production function. The
physical relationship between inputs and output plays an
important part in determining the cost of production. It is
the general description of this physical relation between
inputs and output which forms the subject matter of the
theory of production
BIBLIOGRAPHY
BOOKS REFERRED
:-1.
 
T.R.JAIN V.K.OHRI [Introduction to microeconomics]
[Core economics ] by S.K. AGARWALA

ONLINE RESOURCES
:-1.
 
WWW.ECONOMICS.ORG