PRODUCTION

ANALYSIS
Production is the process that
transforms inputs into output

CONCEPT OF PRODUCTION
Production is a process of combining various material

inputs and immaterial inputs (plans, know-how) in order to

make something for consumption (the output).
Production involves transformation of inputs such as capital,

equipment, labor, and land into output - goods and services

It is the act of creating output, a good or service which has

value and contributes to the utility of individuals.

CONCEPT OF PRODUCTION
The utilities which human effort produces are of following

kinds or various kind of production are

Form Utility iron ore to steel, wood into furniture

2. Place Utility things are transferred from useless or less useful to
places where they will actually used.
3. Time Utility make things available when they are required. Cold
storage
4. Personal Utility services of workers, agents, shopkeepers etc are
included under this head.
1.

Production is an activity that increases consumers usability of the good.

IMPLICATION FOR MANAGER

Managerial decision making involves four

types of production decisions:
1.
2.
3.
4.

Whether to produce or to shut down?

How much output to produce?
What input combination to use?
What type of technology to use?

FACTORS OF PRODUCTION
Factors of
Productio
n
Land
Inelastic, Immobile,
Heterogeneous

Labour
Active, Mobile, Variable
Productivity

Capital

Enterpris
e

Structure, Equipment, Innovative, Risk, Decision

Finance
Making

FACTORS OF PRODUCTION
Land:
It includes all natural resources available from air, water, from above the

land surface and below it which can be used for production.

Labour:
All types of work done by man for a monetary reward.

Capital:
Whole of the stock of wealth consisting of machines, tools, implements,

raw materials etc.

Enterprise:
It consists in bringing the above three factors together, assigning work to

each and bearing the risk and uncertainty of production.

PRODUCTION FUNCTION

PRODUCTION FUNCTION
Q = f ( L, K, D)
A production function is a mathematical equation showing

the maximum amount of output that can be produced from

any specified set of inputs, given the existing technology.
Production function must be considered with reference to a

particular period of time.

Production function of a firm is determined by the state of

technology

PRODUCTION FUNCTION
Q=f(L)

Q = f ( L, K, D)

In short run production function inputs like capital and land are

kept constant and quantity of one input i.e. labour is varied to

increase the output.
The study of production function is also called as law of returns

or law of variable proportions.

In long run production function all inputs are varied to increase

production.
And this is called as law of returns to scale.

FACTORS AFFECTING
PRODUCTION

Technology

State of technology determine firms output.

Inputs
Inputs like land, labour, capital & entrepreneurship affect the level

of production.
Time Period of Production
Variability of input depends on length of the time period.
Short run :- some of the factors input are fixed which limits the

firms output level

Long run :- all the factors input are variable & no limiting factor on
output.

CONCEPTS OF PRODUCT
Total Product (TP):
The total amount of output resulting from a

given production function.

TP of a factor is the amount of total output
produced by a given amount of that factor input,
where other factors held constant.
TP first increases at increasing rate, then after a
certain point it increases at a diminishing rate
and finally TP declines.

CONCEPTS OF PRODUCT
Average product(AP):
Total product per unit of given input factor.
AP = TP/Nos. of Unit of Factor Employed

AP = Q/L

AP initially increases reaches its maximum point

and then start declining.

It has an inverted U shaped curve.

CONCEPTS OF PRODUCT
Marginal product(MP):
The change in total product per unit change in

given input factor.

MP initially increases with increase in output and
then diminishes and finally it became negative.
MP = Q/ L

TABULAR PRESENTATION OF
TP, AP & MP
Variable
Input (L)
0
1
2
3
4
5
6

Total Product
Marginal
Average
(TP)
Product (MP) Product (AP)
0
5
15
35
45
50
45

5
10
20
10
5
-5

5
7.5
11.67
11.25
10
7.5

GRAPHICAL PRESENTATION OF
TP, AP & MP

Output

10 20 30 40 50

TP

AP
O

MP
Variable Input Labour

RELATIONSHIP BETWEEN TOTAL PRODUCT, AVERAGE

PRODUCT, AND MARGINAL PRODUCT
If MP > AP then AP is

rising

If MP < AP then AP is

falling

MP = AP when AP is

maximum

TP is maximum when

MP = 0