Production Function Meaning of Production Function Production function

Production Function

Meaning of Production Function • Production function refers the physical relationship between the use of the inputs such as land, labour, capital, raw material and resulting output of a product, at given technology. Qx = f (L, N, K, R, E, T)

Definition Watson - “Production function is the relation between a firm’s production (output) and the material factors of product (input). ”

Law of Diminishing Marginal Returns. • All other things remaining constant, if only one input is increased a point will be reached where each additional input produces less output than the previous input. • Law of Diminishing Returns: After a certain point, when additional units of a variable input are added to a fixed input, the marginal product of each additional variable input is less than the previous input. • Diminishing returns always apply in the short run, and in the short run every firm will face diminishing returns. This means that every firm finds it progressively more difficult to increase its output as it approaches capacity production.

TYPES OF PRODUCTION FUNCTION • • On the Basis of Time Period On the Basis of Factors of Production On the Basis of Proportions On the Basis of Variation of Output is Short Run

Laws of Returns / Production: Two Types 1. Law of Variable Proportion 2. Law of Returns to Scale

Law of Variable Proportion L K TP AP MP 0 10 0 ----1 10 10 2 10 30 15 20 3 10 60 20 30 4 10 80 20 20 5 10 95 19 15 6 10 108 18 13 7 10 112 16 4 8 10 112 14 0 9 10 108 12 -4 10 10 10 -8

Diagram

The Production Function, Total Product and Marginal Product

Law of Variable Proportion • Observations: 1) With additional workers, output (Q) increases, reaches a maximum and then decreases. 2) The average product of labor (AP), or output per worker, increases and then decreases.

• The marginal 3) product labor (MP), of output or of the additional worker, increases rapidly initially and then decreases and becomes negative.

• Some other Observations: – – When MP = 0, TP is at its maximum When MP > AP, AP is increasing When MP < AP, AP is decreasing When MP = AP, AP is at its maximum

KINDS OF LAWS OF RETURNS • Law of Diminishing Returns or Law of Increasing Cost • Law of Increasing Returns or Law of Diminishing Cost • Law of Constant Returns or Law of Constant Cost