This document provides an overview of the topics covered in the Business Economics unit on the theory of production. It discusses key concepts related to factors of production including fixed and variable factors. It explains the production function and how it relates inputs to outputs. It also describes the laws of variable proportions and returns to scale. Finally, it defines important economic terms like rent, wages, and factors that determine real wages.

1. Course: BBA
Subject: Business Economics
Unit: 5
Theory of
Production

2. Syllabus content
• Rent: Concepts of Differential Rent and Scarcity Rent,
Economic and Contract Rent, Quasi Rent and Pure Rent
• Wages: Concepts of Time Wages, Piece Wages, and
Money wages, real Wages and factors determining real
Wages.
• Production: Meaning and Concept of Production,
Factors of Production and Production function, Fixed
and Variable Factors, Law of Variable Proportion (Short
Run Production Analysis), Law of Returns to a Scale
(Long Run Production Analysis) through the use of ISO
QUANTS.

3. Some Basic Concepts
1. Production: It is a process where inputs are
converted into output.
2. Input : It is anything which is used to produce
goods or service.
3. Output: It is final goods or services produced
after process on input
4. Fixed Factors: The supply of the factors is
constant in short run. Those factors are called as
fixed factors
5. Variable Factors: The supply of the factors
changes in long run. Those factors are called as
variable factors.

4. Factors of Production

5. What Is Production Function ?
• The relationship between the inputs and the
resulting output is described as production
function in Economics.
• A production function shows the relationship
between the amounts of factors used and the
amount of output generated per period of
time.

7. Production Function
Short term : Time when one input (say, capital)
remains constant and an addition to output
can be obtained only by using more labour.
Long run: Both inputs become variable.

8. Law of Variable Proportions
Law of Variable Proportions (Short run Law of
Production)
Assumptions:
• One factor (say, L) is variable and the other factor
(say, K) is constant
• Labour is homogeneous
• Technology remains constant
• Input prices are constant in the time under
consideration

9. Law of Returns to a Scale
• Also called as production function in long run
– X= f (L,K)
– In long run ‘L’ and ‘K’ are variable
– This law shows various combinations of ‘L’ and ‘K’
– The graph is called as isoquants
• Assumptions:
– There are only two factors of production
– Technology does not change
– Continuity in production

10. Isoquant Map
• More than one isoquants depicted in one
graph is called isoquant map

11. Characteristics of Isoquants
• Isoquant slope downward to the right
• Isoquant are always convex to the origin
• Isoquant can never intersect each other

12. Differential Rent And Scarcity rent
• Differential Rent means that the investor who
produces wheat on the more productive lands
reaps an extra-profit or rent on that land.
• Scarcity rent is the cost of "using up" a finite
resource because benefits of the extracted
resource are unavailable to future
generations.

13. Economic and Contract Rent
• Economic rent is the difference between what
an owner of a factor of production (such as
land, capital or labor) receives and the
opportunity cost for that owner.
• Contract Rent is the amount of total
contractual payment made by the tenant to
the landlord according to the agreement

14. Quasi Rent and Pure Rent
• Quasi rent means when one makes
an investment and pays for it, and then earns
income from it without needing to make further
investment.
• Pure Rent means income received from the use
of a resource whose supply, in the long run, is
totally unresponsive to its price because it can
neither be produced nor destroyed by
its consumers.

15. Wages
• The Wage = "price of labor”
• Time Wages: The wages paid according to the
hours of working.
• Piece Wages: The wages paid according to
number of products produced.
• Money Wages: The wages received in terms of
money.
• Real Wages: The wages with real value.

16. Factors determining Real Wages
• Price level:
Money wage remaining constant, Real wage = Money Wage
divided by Price level. Higher the price level, lower will be
the real wage and vice versa.
• Money wages:
If the price level remains constant and the money wages
increase then real wage also increases. But if the rise in
price level is higher than the rise in money income, then
the real income would fall.
• Fringe benefits:
Cash-in-kind or fringe benefits or perks like free
accommodation facilities, free transport, medical
reimbursement, subsidized food from canteen etc. increase
the real wage of a worker.

17. Factors determining Real Wages
• Nature of job:
In a risky and dangerous jobs, money wage may be
higher but real wages are low. For example workers in
mines. The real wage of workers in a regular job is
higher than those in an irregular job.
• Scope for extra earnings:
In jobs where there is a possibility of extra earnings the
real wage would be high.
• Future prospects:
In jobs if future prospects like quick promotion and
higher earnings are possible then the real wage would
be high.