Production Function, Law of Variable Proportions, Return to Scale, Comparison between laws of Returns and Returns to Scale, Economies of Scale of Production.

1. Theory of Production
By JITHIN K THOMAS
BIMS

3. Production Function
• Production Function is the relation between a
firms physical production and the material
factors of production.
• Q= f (L, C, N )
Where Q= quantity of out put, L=Labour, C=Capital, N=Land
In simple form
Q= f (L, C )

4. Features of Production Function
• Substitutability of factors
• Complementarily of factors
• Specificity of factors

5. Types of Production Function
• Short Run Production Function
• Long Run Production Function

6. Production Function
Short Run production
Function
Return to a Factor
One variable factor
Laws of Variable
Proportion
Long Run production
Function
Return to Scale
All factors are variable
Law of Return to Scale

7. Law of Variable Proportions
• As the quantity of one variable input in a
production process is increased, with quantities of
other inputs remaining fixed, marginal physical
product firstly increases, then after reaching a
maximum, starts decreasing and finally becomes
negative.
• Assumptions
– Constant technology
– Factor proportions are variable
– Homogeneous factor units
– Short run

8. Law of Variable Proportions

9. Law of Variable Proportions

10. Conditions or Causes of Applicability
• Fixed Factors of production
• Under utilization of Fixed Factor
• Optimum Production
• Imperfect Substitutes

11. Application of Law of Variable
Proportions
• Application to Agriculture
• Application to Industries

12. Postponement of Law
• Improvement in Technique of Production
• Perfect Substitute

13. Law of Increasing Marginal Returns
• Production of a commodity increases in a
larger proportion as compared to the increase
in the unit of factors of production
• Assumptions
– Some factors of production are variable
– Arrangement of fixed and variable factors can be
made more effective
– At least one factor of production is divisible

14. Law of Increasing
Labour Total production Marginal Production Average product
1 4 - 4
2 10 6 5
3 18 8 6
4 28 10 7
5 40 12 8

15. Law of Increasing Returns
0
5
10
15
20
25
30
1 2 3 4
Total production
Total production

16. Return Diminishing Cost
Labour Total production Total Cost Average Cost
1 4 40 10
2 10 80 8
3 18 150 6.6
4 28 160 5.7
5 40 200 5

17. Causes of Increasing Returns
• Indivisibility of Factors of production
• Division of Labour
• Internal and External Economies of scale

18. In Industry
• Economies of Large Scale
• Elastic supply
• Division of Labour
• More use of Machinery
• Innovation
• Less impact of Nature
• Man is Supreme
• Proper Management

19. Law of Constant Marginal Returns
• When all the productive services are increased
in a given proportion, the product is increased
in the same proportion.
Units of Factor Total Production Marginal Production
1 5 5
2 10 5
3 15 5
4 20 5
5 25 5

20. Law of Constant Cost
Units of Factor Total Production Total Cost Average Cost
1 5 25 5
2 10 50 5
3 15 75 5
4 20 100 5
5 25 125 5
Whether the production increases of decreases, no change occurs in
average cost

21. Law of Diminishing Returns
• With a fixed amount of any one factor of
production, successive increase in other
factors will, after a point, yield a diminishing
increment of output.
• Assumption
– No change in technology
– Short Period
– Homogeneous units
– Measurement of product

22. Law of Diminishing Returns
Land Fertilizer Total Production Marginal Production
2 1 5 -
2 2 8 3
2 3 10 2
2 4 11 1

23. Law of increasing Costs
• When use of more units of labour and capital
is accompanied by diminishing returns, then
there is a tendency for average cost of
production to increase.
Land Fertilizer Total Production Total Cost Average Cost
2 1 5 40 8
2 2 8 80 10
2 3 10 120 12
2 4 11 160 14.5

24. Causes of Operation of the Law
• Fixed factors of production
• Scares Factors
• Lack of perfect Substitutes
• Optimum production

25. Application
• Application of law in Agriculture
• Application in extraction industries
– Mines
– Fisheries
• Building
• Application in Industries

26. Why law in Agriculture
• Limited land
• Less use of Machinery
• Natural factors
• Seasonal Occupation
• Difference in the Fertility of land
• Infective Supervision
• Less change of Division of labour

27. Importance of law
• Basis of Theory of Production
• Basis for Innovation
• Basis of the theory of Rent
• Basis of Theory of Distribution
• Importance to industry

28. Limitations of Law
• New Soil
• Improved methods of cultivation
• Shortage

29. Return to Scale
Long Run Production Function
• Return to Scale refers to changes in output as
all factors change by the same proportion.
Return to
Scale
Increasing
Return
Constant
Return
Diminishing
Return

30. Return to Scale
• Production function
• P = f (L, C)
• If both factors of production labour and
capital are increased in same proportion i.e.,
x, production function will be rewritten as
• P1 = f ( xL, xC )

31. Return to Scale
• If P1 increases in the same proportion as the
increase in factors of production i.e.,
P1
P
= x, it will
be constant return to scale.
• If P1increases less than proportionate increase in
the factors of production i.e.,
P1
P
<x, it will be
diminishing return to scale.
• If P1increases more than proportionate increase
in the factors of production i.e.,
P1
P
<x, it will be
increasing return to scale.

32. Return to Scale

33. Increasing Return to Scale
• If all inputs are doubled, output will also
increase at the faster rate than double.
• Reasons
– Division of labour
– Specialisation
– External economies of scale

34. Constant Return to Scale
• If all inputs are doubled, output will also
doubled.
• Reason
Economies of Scale is
balanced by
diseconomies of Scale

35. Diminishing Returns to Scale
• If all inputs are doubled, output will be less
than doubled.
• Reasons
– Internal diseconomies
– External diseconomies

36. Comparison between laws of Returns
and Returns to Scale
Factors Laws of Return Return to Scale
Nature of inputs Some inputs are fixed All inputs are variable
Time Element Short run production
Function
Long run production
Function
Homogeneity Non Homogeneous
production function
Homogeneous production
function
Law of increasing return Non Linear, Non
Homogeneous production
function
Non Linear, Homogeneous
production function
Law of constant return Linear, Non Homogeneous
production function
Linear, Homogeneous
production function
Law of diminishing return Non Linear, Non
Homogeneous production
function
Non Linear, Homogeneous
production function

37. Economies of Scale of Production
Economies
of Scale
Internal
Economies
External
Economies

38. Internal Economies
• Which are open to a single firm
– Technical Economies
• Economies of Dimension
• Economies of Linked process
• Economies of use of By-products
– Marketing Economies
– Managerial Economies
– Economies of Transport and Storage

39. External Economies
• Benefits which are shared in by a number of
firms or industries
– Economies of Concentration
– Economies of Information
– Economies of Disintegration
– Economies of localisation
– Economies of By-products

40. Diseconomies of Scale of Production
• Internal Diseconomies
– Inefficient Management
– Technical Difficulties
– Production Diseconomies
– Marketing Diseconomies
– Financial Diseconomies

41. Diseconomies of Scale of Production
• External Diseconomies
– Diseconomies of Pollution
– Diseconomies of Strain on Infrastructure
– Diseconomies of High Factor Prices