According to the Parkinson:

“Production is the organized activity of transformation

resources into finished products in the form of goods
and services”.

Mechanical or chemical steps used to create an object,

usually repeated to create multiple units of the same
item. Generally involves the use of raw materials,
machinery and manpower to create a product
Production function expresses a functional or technical
relationship between physical inputs and physical
outputs of a firm at any particular time period.
The output is thus a function of inputs
The factors used for production are called “inputs”.
The production we get is called “output”

Definition for Production function:

“The production function is the name given to the
relationship between the rates of productive
services and the rates of output of the product.”
------ Stigler
Definition for 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
It can be expressed in an allegorical equation:
Q =f(a,b,c, d…….. n)
Where
Q stands for the quantity of output a, b, c, d…..n
are the various inputs.
Production function has to be expressed in a
precise mathematical equation i.e.
Y = a + bx

It is showing the there is constant relationship between

application of input (x) and the amount of output(Y).
Significance / Importance of Production Function :
1.Production function shows the maximum output that can be produced
by a specific set of combination of input factors.
2. There are two types of production function, one is short-run
production function and the other is long-run production function. The
short-run production explains how output change is relation to input
when there are some fixed factors. Similarly, long run production
function explains the behaviors of output in relation to input when all
inputs are variable.
3. The production function explains how a firm reaches the most
optimum combination of factors so that the unit costs are the lowest.
4. Production function explains how a producer combines various
inputs in order to produce a given output in an economically efficient
manner.
5. The production function helps us to estimate the quantity in which
the various factors of production are combined.
 Returns to factors
Returns to factors are also called as factor
productivities, (Productivity, is the ratio of
output to the inputs)
The productivity of a particular factor of
production may be measured by assuming the
other production factors to be constant and only
that particular factor under study is charged.
Returns to factors shows the percentage
increase or decrease in the production due to
percentage increase or decrease in a particular
factor such as labors (or) capital, assuming
other factors to be constant. These returns
may be increasing diminishing or constant.
 The change in productivity can be measured in terms of
the following.

1. Total Productivity: The total output obtained at

varied levels of particular input factor (while other factors
remain constant) is called total productivity.
2. Average Productivity : Average productivity can
be determined by dividing the total physical product
(production) with the number of particular input factor
that is used.
3. Marginal Productivity: The marginal productivity
is the additional output generated by adding an
additional unit of that particular factor keeping the other
factors remains constant.
Total product
The amount of output produced using a given quantity of inputs is
known as total output. As the input increases, the total output also
increases. For example, for a firm producing leather shoes, as the
number of labor and the raw material is increased, output also
increases. When the firm is using just a single labor the firm
produces 2,000 units of shoes. On increasing the labor to three,
the total output rises to 3,000.
It can be observed that total product increases with the increase in
the output, and rate of increase starts decreasing after reaching a
point, which it can be observed in the TP graph as well. It can be
seen in the graph that the total product rises by smaller and
smaller increments as additional units of labor are added. TP curve
rises initially and starts declining after reaching a point.
Average product
Average product can be defined as the total product per unit of factor
employed in the production process. In the given example, average product is
2000 with one labor, every additional labor has resulted in the fall in the
average product.

Marginal product
Marginal product can be defined as the extra product or output added
by one extra unit of that input while other inputs are held constant. In the
given example, it can be seen that the first labor can produce 2000 units of
shoes alone, i.e. the marginal product of the first labor is 2000. On adding one
more unit of labor, total product increases to 3,000, resulting in decline in the
marginal product. With addition of each labor unit, marginal product keeps
declining. When the 6th labor unit is added, marginal product becomes
negative.
Marginal product helps in determining the wages of the labor. Based on the
marginal product, the firm can arrive at the cost and output relationship of
each additional labor. The concept of marginal product also helps a firm to
allocate the scarce resources of the firm. For example, in the given case a
firm could have avoided adding the 6th labor, as it is resulting in the fall of
total product itself
 The Three Stages of Production
Based on the law of diminishing returns, Prof. Cassels
proposed three stages in the production process.
Stage I: Stage I offers increasing average returns to the
factor of production, i.e. (Q/L)/ðL > 0 or MPL > APL .
Thus, in stage I, average product increases and the
marginal product is greater than the average product.
Stage II: In stage II, the average product decreases and so
does the marginal product. But marginal product remains
positive. This stage may be called the stage of decreasing
returns.
Stage III: In stage III, total product decreases and the
marginal product becomes negative.
The Three Stages of Production
 Points to Remember

When MP = AP, AP will be maximum

When MP = 0, TP will be maximum
Stages of Marginal Returns
Increasing marginal returns: From the
starting point of MP until MP reaches its
maximum point.
Diminishing marginal returns: From
the maximum point of MP until MP = 0.
Negative marginal returns: From the
point where MP = 0
 Short Run and Long Run
• Time period can be classified into short run and long
run based on the nature of factors of production.
• Short run refers to a period of production where all
factors of production are not variable. The period
defers from industry to industry, country-to-country,
and firm-to-firm, etc.

Example:
Matchbox industry : 1 day
Soap industry : one year
Shipbuilding industry : 10 years

Long run refers to a period of production where all

factors of production are variable.
LAW OF DIMINISHING
RETURNS
The law states that
successive units of a variable
input work with a fixed input
beyond a certain point the
additional product produced
by each additional unit of a
variable, input decreases
Products Costs in the Short Run (Law of Diminishing
Returns)
In the short run, the shape of the total product (TP) curve
is determined by the law of diminishing returns. Law of
Diminishing Returns (also known as Law of Variable
Proportions) states that given the state of technology, if we
go on employing more of one factor of production, other
things remaining the same, its marginal productivity will
diminish after some point.
Assumption
Law of diminishing returns is based on the following
assumptions.
State of technology is constant.
One factor of production must always be fixed. Thus, this
law is not applicable when all the factor inputs are variable.
This law is not applicable when the two inputs are used in
a fixed proportion. This amounts to say that the law is
applicable only to varying ratios between the two inputs.
 Product Costs in Long Run
Law of diminishing returns is operational only in short run
because of its assumption of one fixed factor input. But in the long
run all the factor inputs are variable.
Law of Returns to Scale: It refers to the long run analysis of
production.
According to the law, the long run output can be increased
by changing all the factors in the same proportion, or by different
proportions.
As all factor inputs are variable in the long run, the
production function isgiven by
Q = f (K, L)
The returns to scale may be of three types –

Constant returns to scale

Decreasing returns to scale
Increasing returns to scale
Types of Returns to Scale

a.Constant Returns to Scale: If the proportionate change in

output is same as the proportionate change in input, then we
say that there are constant returns to scale (CRS).
Symbolically,
CRS: % ΔQ = %ΔI

Decreasing Returns to Scale: If the proportionate change in

output is less than the proportionate change in input, then we
say that there are decreasing returns to scale (DRS).
DRS: %ΔQ < %ΔI

Increasing Returns to Scale: If the proportionate change in

output is more than the proportionate change in input, then we
say that there are increasing returns to scale (IRS).
IRS: %ΔQ > %ΔI
 Returns to Scale
Returns to scale show the responsiveness of total
product when all the inputs are increased
proportionately. Returns to scale is a factor that is
studied in the long run. Returns to scale can be
constant, increasing or decreasing.

Constant returns to scale:

In this case, the change in inputs results in proportional

change in output.

For example, if a firm is using three factors of

production, land, labor and
capital, and if it doubles all these inputs, output should
also be doubled.
Increasing returns to scale:

When rise in inputs result in more than proportional increase in the

output, it is known as increasing returns to scale.

For example, if a plant is producing 100 units of the product using 10

units of labor and 100 units of capital. If the labor is doubled to 20 units
and capital is also doubled to 200 units, and the output generated is
250 units, then the firm is operating at increasing returns to scale level.

Decreasing returns to scale:

When increase in all the inputs result in less than proportional increase
in output, then it is known as decreasing returns to scale.

For example, if a firm increases all its inputs by 20 percent and the
resulting increase in the output is just 15 percent, then it is the case of
decreasing returns to scale.
 ISOQUANTS
• Production function with two variable
inputs or equal product curves

• According to Ferguson, “ An isoquant is a

curve showing all possible combinations
of inputs physically capable of producing
a given level of output”
 ISOQUANTS
An isoquant represents all those
• combinations of inputs which are
capable of producing the same level of
output

• An isoquant is also known as Production-

Indifference curve
Combination Factor X Factor Y Output (units)
(Capital) (Labor)
A 1 12 100
B 2 8 100
C 3 5 100
D 4 3 100
E 5 2
The table shows the different combination of input
factors (i.e. capital and labor) to produce an amount of 100
units. The combination of A shows 1 unit of capital and 12
units of labors to produce 100 units. Similarly, B, C and D
employs 2C + 8L, 3 + 5L and 4C + 2L respectively to
produce the same amount of output i.e. 100 units.
Y-axis

12
8

5
3
2

2 3 4 5 X-axis
0 1
 Assumptions of Isoquants
Assumptions of Isoquants
• Only two factors or inputs of production
• Factors of production are divisible into small
units and used in various proportions
• Technical conditions of production are not
possible to change at any point of time
• Different factors of production are used in a
most efficient way
 Types of Isoquant

• Linear Isoquant
• Right – angle Isoquant-There is
complete non – substituability between
the inputs
• Convex Isoquant-Convex Isoquant
assumes substituability of inputs but
the substiuability is not perfect
 Linear Isoquant
In Linear Isoquant there is perfect subtituability of
Inputs

• For Example – 100 units can be produced by using only

capital or labour or by number of combination of both
capital and labour , say 1 unit of labour and 5 units of
capital
• ,or 2 units of labour and 3 units of capital or various
amount of electric power can be produced by burning
gas only . Oil and gas are prefect substitute here.

• Hence , the Isoquants are straight lines

Oil Linear Isoquant

Q1 Q2 Q3 Q4 Q5 Gas
 The Cobb-Douglass Production Function
• Production function is invented by Jnut Wicksell and
first tested by C.W. Cobb and P.H. Douglas in 1928.
• This famous statistical production function is known as
CobbDougles production function.
• American manufacturing industry.
• Cobb-Dougles production function takes the following
mathematical form
Q = AKaLb
Where,
y = Output
K = Capital
L = Labor
And A,a,b are the parameters
 The Cobb-Douglass Production Function
Assumptions:
• It assumes that output is the function of two factors, i.e. capital
and labor
• There are constant returns to scale
• All inputs are homogenous
• There is perfect competition
• There is no change in technology
Criticism:
Cobb-Douglas production function is criticized because it shows
constant returns to scale. But constant returns to scale are not actuality. Industry
is either subject to increasing returns or diminishing returns.
No entrepreneur will like to increase the inputs in order to have
constant returns only. His aim will be to get increasing returns and not constant
returns
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