Managerial Uses of Production Function

Though production function may seem to be highly abstract and unrealistic, in fact they are
both logical and useful. There are several managerial uses of production function.
1. It can be used to calculate the least cost input combination for a given output.
2. It can be used to calculate the maximum input-output combination for a given cost.
3. Knowledge of production function is useful in deciding on the value of employing a
variable input factor in the production process. As long as the marginal revenue
productivity of a variable input factor exceeds its price, it is worthwhile to increase its
usage. When the marginal revenue productivity just equals the price of input factors
then the additional use of input factors must be stopped.
4. Production function also aid in long run decision making. If the return to scale is
increasing, one can increase production through a proportionate increase in all the
input factors of production.
5. The opposite is true if there is decreasing returns to scale.
6. The producer will be indifferent about increasing or decreasing the production in case
constant returns to scale provided the demand is of no constraint.

DETERMINANTS OF COST
The cost of production of goods depends on a number of factors. These factors may differ from
industry to industry and all may not be applicable to all firms. Some of the important cost
determinants are:
1. Level of output
2. Price of inputs
3. Size of plant
4. Output stability
5. Production lot size
6. Level of capability utilization
7. Technology
8. Learning effect
9. Breadth of product range
10. Geographical location

Level of output: The larger the output, the greater the production cost. Since when there is an
increase in production the variable cost increases. Thus the total cost, varies directly with output.

Price of Inputs: If the price of raw materials, labor, power, increases then naturally the cost of
production goes up. This cost of production varies directly with the prices of inputs.

Size of Plant: Production costs are usually lower in bigger plants than smaller plants. This is so
because larger plants can produce more units and get more profits. (Initial fixed cost may be high but
subsequently TVC is low)

Output Stability: Stability of outputs leads to savings in various kinds of hidden cost of interruption
and learning. Overall costs are generally lower where output is stable and constant over a period of
time.

Production Lot Size: Lot size means the size of the single production job. If the firm is able to
process a bigger lot at a time, then the total cost of operation and thereby the unit cost will be lower.
Level of Capacity Utilization: The higher the capacity utilization, fixed cost per unit of output
(average fixed cost) in bound to be low.