P

RODUCTION FUNCTION

INTRODUCTION:
In micro-economics, a production function is a function that specifies the output of a firm for all combinations of inputs. A meta-production function (sometimes metaproduction function) compares the practice of the existing entities converting inputs into output to determine the most efficient practice production function of the existing entities, whether the most efficient feasible practice production or the most efficient actual practice production clarification needed .In either case, the maximum output of a technologically-determined production process is a mathematical function of one or more inputs. Put another way, given the set of all technically feasible combinations of output and inputs, only the combinations encompassing a maximum output for a specified set of inputs would constitute the production function. Alternatively, a production function can be defined as the specification of the minimum input requirements needed to produce designated quantities of output, given available technology. It is usually presumed that unique production functions can be constructed for every production technology. The production function expresses a functional relationship between quantities of inputs and outputs. The production function is a mathematical expression which relates the quantity of factor inputs to the quantity of outputs that result. We make use of three measures of production / productivity.

Total product is simply the total output that is generated from the factors of production
employed by a business. In most manufacturing industries such as motor vehicles, freezers and DVD players, it is straightforward to measure the volume of production from labour and capital inputs that are used. But in many service or knowledge-based industries, where much of the output is intangible or perhaps weightless we find it harder to measure productivity Average product is the total output divided by the number of units of the variable factor of production employed (e.g. output per worker employed or output per unit of capital employed) Marginal product is the change in total product when an additional unit of the variable factor of production is employed. For example marginal product would measure the change in output that comes from increasing the employment of labour by one person, or by adding one more machine to the production process in the short run.

Algebraically it can be expressed in the form of an equation: Q=f (L, M, N, K, T) (1) Where Q stands for the output of the good per unit time, L stands for labour, M for management, N for land or natural resources, K for capital and T for given technology, and refers to the functional relationship. The production function with many inputs cannot be depicted on a diagram. Moreover, given the specific values of the various inputs, it becomes difficult to solve such a production function

mathematically. Economists, therefore use a two input production function. If we take two inputs, labour and capital, the production assumes the form: Q= f (L, K) (2) The production function as determined by technical conditions of production is of two types: i. ii. The short run production function or rigid production function The long run production function or flexible production function

THE SHORT RUN PRODUCTION FUNCTION:

In the short run, the technical conditions of production are rigid so that the various inputs used to produce a given output are in fixed proportions. The short run is defined in economics as a period of time where at least one factor of production is assumed to be in fixed supply i.e. it cannot be changed. We normally assume that the quantity of capital inputs (e.g. plant and machinery) is fixed and that production can be altered by suppliers through changing the demand for variable inputs such as labour, components, raw materials and energy inputs. Often the amount of land available for production is also fixed. The time periods used in textbook economics are somewhat arbitrary because they differ from industry to industry. The short run for the electricity generation industry or the telecommunications sector varies from that appropriate for newspaper and magazine publishing and small-scale production of foodstuffs and beverages. Much depends on the time scale that permits a business to alter all of the inputs that it can bring to production. In the short run, the law of diminishing returns states that as we add more units of a variable input (i.e. labour or raw materials) to fixed amounts of land and capital, the change in total output will at first rise and then fall. Diminishing returns to labour occurs when marginal product of labour starts to fall. This means that total output will still be rising but increasing at a decreasing rate as more workers are employed. As we shall see in the following numerical example, eventually a decline in marginal product leads to a fall in average product. What happens to marginal product is linked directly to the productivity of each extra worker employed. At low levels of labour input, the fixed factors of production - land and capital, tend to be under-utilized which means that each additional worker will have plenty of capital to use and, as a result, marginal product may rise. Beyond a certain point however, the fixed factors of production become scarcer and new workers will not have as much capital to work with so that the capital input becomes diluted among a larger workforce. As a result, the marginal productivity of each worker tends to fall this is known as the principle of diminishing returns. The short run production function in the case of two inputs, lobour and capital, with capital as fixed and labour as the variable input can be expressed as Q=f (L, K*) (3) Where K* refers to fixed input.

THE LONG RUN PRODUCTION FUNCTION:

In the long run, all inputs are variable. Production can be increased by changing one or more of the inputs. Eqns (1) & (2) represent the long run production function. Long run is the period where the fixed factor is changed. If the demand for the firm's product increases, the firm can increase its output by enlarging the size of its plant or increasing the scale of its operations. So in the long run there is enough time to effect changes in the scale operations or to introduce other adjustment in the organization set- up of the firm. In fact the firm in the long period, can build any desired scale of plant. All factors are variable none is fixed. In the long run, then, there are number of decisions that a firm will have to make about the scale of its operations, the location of its operations and the techniques of production it will use. In this concept it explains the laws of return to scale. The law of return to scale is long run concept. In the long run volume if production can be changed by changing all factor of production. It shows the behavior of output when all factor are altered in the same proportion. To understand laws of return we have to know about Isoquants.

PRODUCTION FUNCTION WITH ONE VARIABLE UNIT.

The law of production states the relationship between output and input. In the short run, Inputoutput relations are studies with a variable input (labour), other inputs capital held constant. The law of production under this condition is called the law of return to a variable input. The law of diminishing returns to a variable input. The law of diminishing return:-it refers that when more and more unit of a variable are used with a given quantity with a fix input , the total output may initially increase at increasing rate and at a constant rate , but it will eventually increase at diminishing rate.

Assumptions.
1. labour is only variable input and capital remaining constant. 2. labour is homogeneous. 3. The state of technology is given. 4. Input price are given.

Application of the law of diminishing return:The law of diminishing return is an empirical law, frequently observed in various production activities. This law may not apply universally to all kind of productive since it is not as true as law of gravitation. In some productive activities it may operate quickly, in some it operation may take a little longer time and in some other, it may not appear to all. This law has been found to operate in agriculture production .the reason is in agricultural, natural factor play a predominant role whereas manmade factor play the major role in industrial production.

The law of diminishing return and business decisions:The law of diminishing return as presented graphically has a relevance to the business decisions. The graph can help in identifying the rational and irrational stages of operations.it can say that the

Business manager the number of workers to apply the given the input that given all other factor is maximum.

LAW OF NON-PROPORTIONAL RETURN OR VARIABLE PRORORTION.

It is one of the fundamental laws of economics .This law deals with behavior of production in shortrun.In short run factors of production are of two types fixed factor of production and variable factor of production. Law of variable proportion shows the production function with one variable while other factors of production are kept constant. The ratio of variable factor to fixed factor in the production process increases when the proportion of variable factor to fixed factor is increased. The law of variable proportion exhibits the direction and the rate of change in the firms output when the amount of only one factor of production is varied. The law is known as the law of the variable proportion because in this law we study the effects of variation s in factor proportion because in this law we study the effects of variation in factor proportion of the firms production.

Assumption of the law

The law of variable proportion hold good only if the following condition prevail, Constant technology: The law of variable proportion assumes the technique of production constant. The reasons that if state of technology changes then marginal and average producer may rise instead of diminishing. Short run: The law specially runs in the short run because here some factors are fixed and the proportion of others has to be varied. It assumes that one factor is variable while the others are fixed. Homogeneous factors: This law is based on the assumption that the variable resource is applied unit by unit. And each factor unit is homogeneous. Changeable input ratio: The law supposes the possibility of the ratio of fixed factors to variable factors being changed. In other words, it is possible to use various amount of variable factor with fixed factor of production.

Explanation of the law

Suppose a farmer has 10 acres of land to cultivate. The land has some fixed investment on it: a tube well, farm house and farm equipment. In order to increase his farm output, the amount of land and capital is called fixed factor of production. The farmer can vary the number of men to be employed on its cultivation. Any change in the number of men employed will change total output also. The response of output to the increase in the variable factor labour is shown in the table. We define average product and marginal product as follows. Average Product (A) = total product/unit of labour Marginal Product (MP) =TPn-TPn-1

Number of men

Total product (in quintal)

Average product (in quintal)

Marginal Product (in quintals)

1 2 3 4 5 6 7 8

50 110 135 150 160 165 165 160

50.00 55.00 45.00 37.00 32.00 27.00 23.57 20.00

50 60 25 15 10 5 0 -5

stage 1

stage 2

stage 3

This table shows changes in the firms output when one variable factor namely labour is varied .At first, as the number of men increased .But as more men employed ,the average product falls and the marginal product falls faster .Fall of the marginal and the average product continues as more men are put on farm .Hiring of the seventh men is fruitless, since he adds nothing to the production on the farm (because his MP is zero ).Hence forth more men are added they will prove nuisance to the already working men and will decrease production rather than increase it ;in other words the marginal product of labour would become negative. We state the law of variable proportion with reference to the behavior of the marginal product .In the given production function shown in the table behavior of the marginal product clearly shows three stages: in the first MP increases; in the second it continues to fall; and in the third, it becomes negative.

THE LAW OF DIMISHING RETURN.

The law of diminishing returns states that when more and more units of a variable input are used with a given quantity of a fixed inputs, the total output may initially increase at increasing rate and then at a constant rate, but it will eventually increase at diminishing rates. That is, the marginal increase in total output decreases eventually when additional units of a variable factor are used, given quantity of fixed factors. ASSUMPTIONS 1. The state of technology is assumed to be given unchanged. If there is improvement in technology then marginal and average product may rise instead of diminishing. 2. There must be some other inputs such as capital must be kept fixed. It is only in this way then that we are able to measures the changes in output caused by increase in a variable factor that we can alter factors proportions and know its effect on output. This law does not apply in case all factors are proportionately varied.

3. The law is based upon the possibility of varying the proportion in which the various factors can be combined to produce a product. The law does not apply to those cases where the factors must be used in fixed proportions to yield a product. When the various factors are required to be used in rigidly fixed proportions, then the increase in the increase in one factor would not lead to any increase in output, that is, the marginal product of the factor will then be zero and not diminishing. It may be however be pointed out that products requiring fixed proportions of factors are quite uncommon.

THREE STAGE OF PRODUCTION

The three stages of production are characterized by the slope and shape of the total product curve. The first stage is characterized by an increasingly positive slope, the second stage by a decreasingly positive slope, and the third stage by a negative slope. Because the slope of the total product curve IS marginal product, these three stages are also seen with marginal product. In Stage I, marginal product is positive and increasing. In Stage II, marginal product is positive, but decreasing. And in Stage III, marginal product is negative. Three Product Curves The three stages of short-run production are readily seen with the three product curves--total product, average product, and marginal product. A set of product curves is presented in the exhibit to the right. The variable input in this example is labour. The top panel contains the total product curve (TP). It generally rises, reaches a peak, and then falls. The bottom panel contains the marginal product curve (MP) and the average product curve (AP). Both curves rise a bit for small quantities of the variable input labour, then decline. Marginal product eventually turns negative, but average product remains positive. The three short-run production stages are conveniently labeled I, II, and III, and are separated by vertical lines extending through both panels. Stage I Short-run production Stage I arise due to increasing marginal returns. As more of the variable input is added to the fixed input, the marginal product of the variable input increases. This is directly illustrated by the slope of the marginal product curve, and because marginal product IS the slope of the total product curve, increasing marginal returns is also reflected in total product. Consider these observations about the shapes and slopes of the three product curves in Stage I. The total product curve has an increasing positive slope. In other words, the slope becomes steeper with each additional unit of variable input. Marginal product is positive and the marginal product curve has a positive slope. The marginal product curve reaches a peak at the end of Stage I. Average product is positive and the average product curve has a positive slope.

Stage II In Stage II, short-run production is characterized by decreasing marginal returns. As more of the variable input is added to the fixed input, the marginal product of the variable input decreases. Most important of all, Stage II is driven by the law of diminishing marginal returns. The beginning of Stage II is the onset of the law of diminishing marginal returns. The three product curves reveal the following patterns in Stage II. The total product curve has a decreasing positive slope. In other words, the slope becomes flatter with each additional unit of variable input. Marginal product is positive and the marginal product curve has a negative slope. The marginal product curve intersects the horizontal quantity axis at the end of Stage II. Average product is positive and the average product curve at first has a positive slope, then it has a negative slope. The average product curve reaches a peak in the middle of Stage II. At this peak, average product is equal to marginal product. Stage III The onset of Stage III results due to negative marginal returns. In this stage of short-run production, the law of diminishing marginal returns causes marginal product to decrease so much that it becomes negative. Stage III production is most obvious for the marginal product curve, but is also indicated by the total product curve. The total product curve has a negative slope. It has passed its peak and is heading down. Marginal product is negative and the marginal product curve has a negative slope. The marginal product curve has intersected the horizontal axis and is moving down. Average product remains positive but the average product curve has a negative slope.

LAW OF RETURNS TO SCALE

Definition and Explanation: The law of returns are often confused with the law of returns to scale. The law of returns operates in the short period. It explains the production behavior of the firm with one factor variable while other factors are kept constant. Whereas the law of returns to scale operates in the long period. It explains the production behavior of the firm with all variable factors. There is no fixed factor of production in the long run. The law of returns to scale describes the relationship between variable inputs and output when all the inputs, or factors are increased in the same proportion. The law of returns to scale analysis the effects of scale on the level of output. Here we find out in what proportions the output changes when there is proportionate change in the quantities of all inputs. The answer to this question helps a firm to determine its scale or size in the long run.

It has been observed that when there is a proportionate change in the amounts of inputs, the behavior of output varies. The output may increase by a great proportion, by in the same proportion or in a smaller proportion to its inputs. This behavior of output with the increase in scale of operation is termed as increasing returns to scale, constant returns to scale and diminishing returns to scale. These three laws of returns to scale are now explained, in brief, under separate heads.

1. Increasing returns to scale

Returns to scale increases because the increase in total output is more than proportional to the increases in all inputs. The table reveals that in the beginning with the scale of production of (1 worker+2acres of land), total output is 8.to increases output when the scale of production is doubled (2 worker+4acres of land), total return are more than doubled. They become 17.Now the scale is trebled (3 workers+6acres of land), return become more than threefold, i.e27.

Unit

Scale of Production

Total Return 8 17 27 38 49 59 68 76

Marginal Returns 8 9 10 11 11 10 9 8

1worker+2Acres land 2worker+4Acres land 3worker+2Acres land 4worker+4Acres land 5worker+2Acres land 6worker+4Acres land 7worker+14Acres land 8worker+16Acres land

2. Constant returns to scale:

Return to scale becomes constant as the increases in total outputs are in exact proportion to the increases in inputs. If the scale of production in increased further, total returns will increases in such a way that the marginal returns become constant. In the table, for the 4th and 5th units of the scale of production, a marginal return, to scale is constant.

Causes of return to scale

Internal Economics and Diseconomies: But increasing returns to scale do not continue indefinitely. As the firm expands further, internal economics are counter balanced by internal diseconomies Return increase in the same proportion so that there are constant returns to scale over a large range of output. External Economics and Diseconomies: The returns to scale is constant when external diseconomies and economics are neutralised and output increases in the same proportion. Divisible Factors: When factors of production are perfectly divisible, substitutable,and homogeneous with perfectly elastic supplies at given prices, return to scale at constant.

Causes of Increasing Return to Scale

Return to scale increases due to the following reasons: Indivisibility of Factor: Return to scale increases because of the indivisibility of the factors of production. Indivisibility means that machine, management, labour, finance etc. cannot be available in very small size. They are only available in certain minimum sizes. When a business unit expand, the return to scale increases because the individual factors are employed to their maximum capacity. Specialisation & Division of Labour: Increasing Return to scale also result from specialisation and division of labour. When the scale of the firm is expended there is wide scope of specialization and division of labour. Work can be divided into small tasks and workers can be concentrated to narrower range of processes. Internal Economics: As the firm expands, it enjoys internal economics of production. It may be able to install better machines, sell its products more easily, borrow money cheaply, procure the services of more efficient manager and workers, etc.

3. Diminishing Returns to Scale:

Return to scale diminishing because the increase in output is less than proportional to the increase in inputs. The table show that when output is increased from the 6th.7th, and 8th units, the total unit increase at a lower rate than before so that the marginal returns start diminishing successively to 10, 9 and 8.

Causes Diminishing Return to Scale

Constant return to scales is only a passing phase, for ultimately returns to scale start diminishing. Indivisible factors may become inefficient and less productive. Business may become unwieldy and produce problems of supervision and coordination. Large management creates difficulties to control and rigidities. To these internal diseconomies are added external diseconomies of scale. These arise from higher factor prices or from diminishing productivities of the factors.