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PRESENTATION ON
PRODUCTION FUNCTION
AND ANALYSIS.
WHAT IS PRODUCTION?
Production involves combining two or more factors of
production to produce output. Producers are suppliers
in the product market and consumers in the input
markets.
WHAT
SHOULD
THE FIRM
PRODUCE
?
HOW
HOW
SHOULD
SHOULD
THE
THE FIRM
FIRM
PRODUCE
PRODUCE
??
HOW
HOW
MUCH
MUCH
SHOULD
SHOULD
A
A FIRM
FIRM
SELL?
SELL?
HOW
HOW
SHOUL
SHOUL
D
D THE
THE
FIRM
FIRM
PROMO
PROMO
TE?
TE?
SALES
MAXIMIZATIO
N
PROFIT
MAXIMIZATIO
N
PRODUCTION FUNCTION
Production function refers to the technical
relationship between the quantity of goods
produced(output) and the factors of
production(input) necessary to produce it.
Production function can be expressed with the
following equation:
Y= f(L, K, S)
It reads: Production(Y) is a function (f) of labor
(L), Capital(K) and land(S).
DEFINATION OF
PRODUCTION FUNCTION
Production
Function is that
function which
defines the
maximum amount
of output that can
be produced with a
given set of inputs.
Michael R
Baye
TYPES OF PRODUCTION
FUNCTON
PRODUCTION
PRODUCTION
FUNCTION
FUNCTION
INVOLVING
INVOLVING
CHANGES
CHANGES IN
IN
PROPORTION
PROPORTION
PRODUCTION
PRODUCTION
FUNCTION
FUNCTION INVOLVING
INVOLVING
CHANGE
CHANGE IN
IN SCALE
SCALE
PRODUCTION
PRODUCTION
FUNCTION
FUNCTION
INVOLVING
INVOLVING CHANGE
CHANGE
IN
IN
PROPORTION/SCALE
PROPORTION/SCALE
CHANGES
CHANGES IN
IN SINGLE
SINGLE
VARIABLE
VARIABLE
CHANGE
CHANGE IN
IN ALL
ALL
FACTORS
FACTORS IN
IN THE
THE
SAME
SAME PROPORTION
PROPORTION
CHANGE
CHANGE IN
IN TWO
TWO OR
OR
MORE
MORE INPUTS
INPUTS
WHICH
WHICH ARE
ARE
SUBSTITUTES
SUBSTITUTES
LAW
LAW OF
OF VARIABLE
VARIABLE
PROPORTION
PROPORTION
(generally
(generally short
short run)
run)
LAW
LAW OF
OF
RETURNS(always
RETURNS(always
long
long run
run analysis)
analysis)
EXPLAINED
EXPLAINED WITH
WITH
THE
THE HELP
HELP OF
OF
ISOQUANTS
ISOQUANTS
ASSUMPTIONS OF
PRODUCTION FUNCTION
Technology is assumed to be constant.
It is related to a particular or specific
period.
It is assumed that the manufacturer is
using the best technology.
All inputs are divisible.
Utilization for inputs at maximum level
of efficiency.
LAWS OF PRODUCTION
LAW
LAW OF
OF VARIABLE
VARIABLE
PROPORTIONS
PROPORTIONS OR
OR
RETURN
RETURN TO
TO A
A
FACTOR
FACTOR
A
A single
single variable
variable
factor
factor (other
(other
factors
factors constant)
constant)
Generally
Generally short
short run
run
analysis.
analysis.
LAW
LAW OF
OF RETURNS
RETURNS TO
TO
SCALE
SCALE
All
All factors
factors are
are
variable
variable in
in the
the
same
same proportion.
proportion.
Always
Always long
long run
run
analysis.
analysis.
SHORT TERM
PRODUCTION FUNCTION
LAW OF VARIABLE
PROPORTIONS
The law of variable proportion states that if the
input of one resource is increased by equal
increments per unit of time while the input of
other resources are held constant, total output will
increase but beyond sometime the resulting
output increases will become smaller and smaller.
ASSUMPTIONS TO THE
LAW
ILLUSTRATION OF THE
LAW
UNITS OF
INPUT(L)
TOTAL
PRODUCT
(TP)
MARGINAL
PRODUCT(
MP)
AVERAGE
PRODUCT(
AP)
STAGE
100
100
100
220
120
110
360
140
120
460
100
115
530
70
106
570
40
95
595
25
85
600
75
594
-6
66
10
560
-34
56
CASE STUDY
YEAR
PRODUCTION
NUMBER OF
EMPLOYEES
OUTPUT/EMP
LOYEE/YEAR
1997
1439174
21273
67.7
1998
1354482
18589
72.9
1999
1381765
18585
74.3
2000
1432471
17213
83.2
2001
1212748
13819
87.8
2002
1356463
13482
100.6
2003
1457066
12338
118.1
2004
1516876
11531
131.5
LAW OF RETURN TO
SCALE & ISOQUANT
APPROACH
In this case, the firm expands its output by using
more of two variable inputs that are substitute for
each other. For this purpose a production function
with two variable inputs is introduced.
The inputs are mutually substitutable and law of
diminishing returns operates with the respect to
each output.
THE GEOMETRIC REPRESENTATION OF THIS
FUNCTIONAL RELATIONSHIP IS CALLED ISOQUANT
CURVE.
ISOQUANT CURVE
A graph of all possible combinations of inputs that
results in the production of the given level of
output.
ECONOMIC REGION OF
PRODUCTION & RIDGE
LINES
These lines represent the limits of the economic
region of production. Ridge line join those points
on different isoquant curves which determine the
economic limits of production. It will be profitable
and economical for the firm to produce only in
those segments of the isoquants which lie in
between the ridge lines.
PRODUCERS EQUILIBRIUM
(optimum combination of
factors)
It refers to the situation In which a producer
maximizes his profits.
Optimum or least cost combination is that
combination at which either
1. The output derived from the given level of
inputs is maximum.
2. The cost of producing a given output is
minimum.
Q = Output, K = Capital, L =
PRODUCTION ISOQUANTS
An isoquant(derived from quantity and the Greek
word iso, meaning equal) shows the various
combinations of two inputs that the firm can
use to produce a specific level of output.
They are also known as equal product curves or isoproduct curves or product indifference curves.
PROPERTIEs of isoquant :
An isoquant always slopes downwards to the right.
They are usually convex to the origin.
They do not intersect each other.
A higher isoquant refers to a larger output , while a
lower isoquant refers to a smaller output.
1 2040556575
2 4060758590
3 557590100 105
4 6585100 110 115
5 7590105 115 120
4 5
The
The Isoquant
Isoquant Map
Map
Capital
per year 5
4
3
Q3 = 90
D
Q2 = 75
Q1 = 55
MARGINAL RATE OF
TECHNICAL
SUBSTITUTION
MRTSLK K
1
1
Q3 =90
2/3 1
1/3
Q2 =75
Q1 =55
5
C
Q1
Q2
Q3
Labor
per month
Q3
C
Q2
B
K1
A
L1
Q1
Labor
per month
APPLICATION OF EQUAL
PRODUCT CURVE
The isoquant technique is applicable to
agriculture and to all lines of manufacturing.
MRTS guides in the substitution of some units of
one input for some units of another input.
The businessman tries various permutations and
combinations and the isoquant technique helps
him in reaching the most economical
combination.
THANKYOU!