PRODUCTION

Production is the process of converting a input into a more valuable output.

PRODUCTION FUNCTION:

The relationship between the inputs to the production process and the resulting output is described by production function. Land, labor, capital, management and technology are the five major determinants of any output. The dependent variable, output Q is a positive function of the independent variables, i.e. factors of production. Q= F(Ld,L,K,M,T)

INPUTS CAN BE CLASSIFIED AS FOLLOWS:

1. FIXED INPUTS:

A fixed input is defined as one whose quantity cannot be changed instantaneously in response to changes in market conditions requiring an immediate change. Eg. Buildings, major equipment, etc.
2. VARIABLE INPUTS:

A variable input is one whose quantity can be changed readily when market conditions suggest that an immediate change in output is beneficial to the producer. Eg. Raw materials and labor.

ISOQUANTS
An isoquant is the locus of all the combinations of two factors of production that yield the same level of output. Suppose a firm want to produce 100 units of a commodity X and for this purpose can use any one of the six processes:
PROCESSES
1 2 3 4 5 6

UNITS OF LABOUR
1 2 3 4 6 9

UNITS OF CAPITAL
10 7 5 4 3 2

TYPES OF ISOQUANTS
1. LINEAR ISOQUANT

In

case of perfect substitutability of the factors of production, the isoquant will assume the shape of a straight line sloping downwards from left to right.

When factors of production are not substitutes but complementary, technical coefficients are fixed. That is, the optimum output is obtained only when the factors of production are used in a fixed proportion.

This type of isoquant is also called Leontif isoquant after Wassily Leontif. Input-Output isoquant does not imply that by increasing the quantities of the two factors of production ,viz., labor and capital the output will increase proportionately; it implies that for producing any quantity of a commodity, capital and labour must be used in a fixed proportion.

ISOQUANT MAP
The production function shows how output varies as the factor inputs change. Therefore, there are always a number of isoquants for a producer depicting levels of production(one isoquant depicting one particular level of production). Isoquants nearer the point of origin represent relatively lower level of production. The level of production increases as one moves from the origin and goes to higher isoquant.

ASSUMPTIONS OF ISOQUANTS
1. There are only two factors or inputs of production. 2. The factors of production are divisible into small units and can be

used in various proportions. Technical conditions of production are given and it is not possible to change them at any time.
3.

Given the technical conditions of production, different factors of production are used in most efficient way.
4.

PROPERTIES OF ISOQUANTS
1. ISOQUANTS ARE NEGATIVELY SLOPED:

Normally isoquants slope downward from left to right implying that they are negatively sloped. The reason for this characteristic of the isoquant is that when the quantity of one factor is reduced, the same level of output can be achieved only when the quantity of the other is increased. This characteristic of the isoquant, however, assumes that in no case marginal productivity of a factor will be negative.

2. A HIGHER ISOQUANT REPRESENTS A LARGER OUTPUT:

A higher isoquant is one that is farther from the point of origin. It represents a larger output that is obtained by using either the same amount of one factor and the greater amount of the other factor or the greater amounts of both the factors.

3. NO TWO ISOQUANTS TOUCH OR INTERSECT EACH OTHER:

Isoquants do not intersect or touch each other because they represent different levels of production.

4. ISOQUANTS ARE CONVEX TO THE ORIGIN:

In most production processes the factors of production have substitutability. Often labor can be substituted for capital and vice versa. However, the rate at which one factor is substituted for the other in a production process, that is, the marginal rate of technical substitution (MRTS) tends to fall.
The isoquants are convex to the origin precisely because the marginal rate of substitution tends to fall.

It is clear from the figure that JK > KL > LM > MN. In other words, as additional units of labor are employed it becomes progressively more and more difficult to substitute labor in place of capital so that lesser and lesser units of capital can be replaced by additional units of labor. This means that the MRTS tends to fall. This is due to the reason that factors of production are not

Perfect substitutes for one another. When the quantity of one factor is reduced, it becomes necessary to increase the quantity of the other at an increasing rate.
If factors are perfect substitutes If factors are complementarity strict MRTS = 1 MRTS = 0 Linear isoquant

Right isoquant

angled

RETURNS TO A FACTOR
The return to a factor is the relationship between output and variation in one input while keeping the other factor inputs constant. This relationship is also known as productivity of a factor of production. It is a short-run relationship. It helps in finding out the optimal combination for a production system.
FACTOR PRODUCTIVITIES ARE OF THREE TYPES:
1. TOTAL PHYSICAL PRODUCT (TPP)

TPP is the total amount of a commodity produced during a given period of time by a given number of factors of production. In other words, TPP means total physical output produced by a given number of input, keeping all other inputs constant. TPP = MPP
OR

TPP = APP x N

2. AVERAGE PHYSICAL PRODUCT (APP)

APP is the total physical product (TPP) divided by the number of units of a factor. Thus, APP means the per unit output of a variable input.
APP = TPP/ N

3. MARGINAL PHYSICAL PRODUCT (MPP)

MPP is the change in total physical product resulting from the use of one more (or one less) unit of the variable input, keeping all other inputs constant. MPP thus measures the rate at which total product is changing as one factor changes.
MPP = TPP/F

No of workers (L)

Total product (TP) (no of pens)

Avg product (AP) Marginal product (no of pens) (MP) (no of pens)

1 2 3 4 5 6 7 8 9 10 11

100 220 360 520 650 750 840 880 880 830 770

100 110 120 130 130 125 120 110 97.7 83 77

0 120 140 160 130 100 90 40 0 -50 -60

RETURNS TO SCALE
The relationship between the output and variation in all the inputs taken together is known as returns to scale. All the factors of production are changed in the same proportion and in the same direction. Returns to scale are measured by comparing the percentage change in output with the percentage change in all inputs.
Returns to scale can be of three types: increasing returns to scale, decreasing returns to scale and constant returns to scale.

When proportionate increase in total output is more than proportionate increase in inputs, it is increasing returns to scale.
UNITS OF LABOR UNITS OF CAPITAL TPP

1. INCREASING RETURS TO SCALE:

2
4

2
4

100
250

2. CONSTANT RETURNS TO SCALE:

The constant returns to scale means that if all factor-inputs are varied at a certain percentage rate, output change by the same rate. Or, when the increase in output is proportionate to the increase in all factor-inputs, it is termed as constant returns to scale.
UNITS OF LABOR
2 4

UNITS OF CAPITAL
2 4

TPP
100 200

3. DIMINISHING RETURNS TO SCALE:

When the proportionate increase in output is less than the proportionate increase in quantities of all factor-inputs, it is termed as diminishing returns to scale.
UNITS OF LABOR 2 UNITS OF CAPITAL 2 TPP 100

150