Physical Production Relationships

(Chapter 2)

Principles of Agricultural and Resource Economics

AE - 201

Mr. Qasir Abbas

Institute of Agricultural and Resource Economics
University of Agriculture, Faisalabad
 Introduction
Input
Output
Combination of goods and services
Factors of production

How much to produce?

What to produce?
How to produce?
When to produce?
 Introduction Contd..
Purpose is to provide you with the best understanding

Physical production process

Relationship between physical production and

resultant output

It is not a mathematical or economic situation solving

 Theory of Firm

Decision for inputs

Combination of goods and services
Decided by manager and firm behave accordingly

Its also called theory of firm

Purpose is to maximize the profit

Revenue-cost = Profit
 How to combine factors of production?

Combination of goods and services

Examples of input factors

Wheat = fertilizer+water+seed+labor+machinery+land
 Notations
X and Y

X = input factors

Y = Output/production

Y = X1 + X2 + X3Xn
 Factors of Production (Types)
Fixed factors of production

Variable factors of production

Immediate short-run

Intermediate short-run or short-run

Long-run factors of production

 Production Function

The technical relationship between input and output

indicating the maximum amount of output that can be
produced using alternative amounts of variable inputs in
combination with one or more fixed inputs under a given
state of technology.
 Production Function Contd.

Relationship describing the way inputs and outputs are

physically correlated
Amount of output depends on the amount of input added
Production function can be described in several ways

Mathematical form/relationship

Y = f(X1,X2,X3Xn)
 Production Function Contd.
f means result from

OR

is a function of

Y = f(X1,X2,X3Xn)
 Production Function Contd.
Y = f (X1 l X2,X3,Xn)

Variable and fixed factors of production distinguishing

X1 = variable
 Slope and Relationship
Linear relationship

Slope ( of straight line is the ratio of the vertical change

to the horizontal change between any two points)

Slope = vertical change__

horizontal change

Cetirus paribus
 Equation of a Relationship
Vertical Intercept ( of a line is the point where the line
meets the vertical axis)

y = a+ bx

y = dependent variable
a = vertical intercept
b = slope of line
x = independent variable
 Example

Income Consumption Point

0 50 A

100 100 B

200 150 C

300 200 D

400 250 E
 Example Contd..
Income Saving Point

20 0 A

50 20 B

100 50 C

150 100 D

200 150 E
 Production Function Examples
Y = 20 + bX

Y = 20 + 0.4 X

Y = 20 + 0.4 (0) = 20

Y = 20 + 0.4 (30) = 32
 Production Schedule
Amount of X Amount of Y (Wheat Point
(fertilizer used) Yield)

0 20 A

10 24 B

20 28 C

30 32 D

40 36 E

Production schedule is a tabular summary of the input-output

relationship.