theory of production

1. THEORY OF PRODUCTION

2. Learning Objectives
• define the production function
• explain the various forms of production functions
• provide examples of types of inputs into a production function
for a manufacturing or service company
• understand the law of diminishing returns, Law of Returns to
Scale.
• use the Three Stages of Production to explain why a rational
firm always tries to operate in Stage II
• Determine cost minimising factor combination and optimum
output level.

3. Definition
• Production is the act of transformation of resources
into commodities over time and/or space.
• Production Function :
It refers to the physical Relation ship between the
use of the inputs (Factors of Production) and
resulting output of a Product

4. Production Activity Flows :
• Process or Flow Production
This type of activity involves an integrated technology in the process of
transforming raw materials inputs into outputs . It is highly mechanized
and operated automatically. Ex : Oil Refinery
• Mass Production : Rigid
This category refers to standardization of Production activity employing a
well-defined genuinely proven capital and technology in a rigid manner.
• Mass Production : Flexible
In this the approach is to involve several product parts into the process to
alter to the different forms of segments
• Customer based Production
Under this, the product is meant to be produced as per the order.

5. Production Function
A Production Function refers to the functional relationship, under the given
technology, between physical rates of input and output of a firm, per unit of time.
Using one-output and two-input function, the relationship between output and
inputs is summarized in the following form:
Q = f (L, K)
where Q denotes the quantity of output produced and L and K denote the
respective quantities of labour—the human resource— and capital—the physical
resource—used.
The form of production function of an establishment is determined by the state of
technology whose size depends on the time span. This means that a short run
production function is different from a long period production function.

6. Time Element and Production Functions
• The Short Run
• This is defined as a period of time over which the inputs of
some factors of production cannot be varied. The factors
which cannot be altered in the short run are fixed factors.
• The Long Run
• The long run is a period of time long enough to permit
variations in the inputs of all factors of production employed
by the firm.

7. • The form of production function of an
establishment is determined by the state of
technology whose size depends on the time
span. This means that a short run production
function is different from a long period
production function.

8. Law of Variable Proportion
• The Law of Variable Proportions which is the new name of the famous law
of Diminishing Returns has been defined by Stigler in the following words:
• "As equal increments of one input are added, the inputs of other
productive services being held constant, beyond a certain point, the
resulting increments of produce will decrease i.e., the marginal product
will diminish".
• According to Samuelson:
• "An increase in some inputs relative to other fixed inputs will in a given
state of technology cause output to increase, but after a point, the extra
output resulting from the same addition of extra inputs will become less".

9. Law of Variable Proportion
• Assumptions:
The law of variable proportions also called the law of diminishing returns
holds good under the following assumptions:
(i) Short run. The law assumes short run situation. The time is too short for a
firm to change the quantity of fixed factors. All the, resources apart from
this one variable, are held unchanged in quantity and quality.
(ii) Constant technology. The law assumes that the technique of production
remains unchanged during production.
(iii) Homogeneous factors. Each factor unit in assumed to he identical in
amount and quality.
•

10. • The law of variable proportions is, now explained with the help of table and graph.
•
• Schedule:
•
• Fixed Inputs (Land Capital)
• Variable Resource (labor)
• Total Produce (TP Quintals)
• Marginal Product (MP Quintals)
• Average Product (AP Quintals)
• Increasing marginal return10
• Diminishing marginal returns12.3
• 11.8
• 11.0
• 10.0
• 9.0
• 3030
• 89
• 6362
• 0-1
• Negative marginal returns
• 7.96.8
•
• In the table above, it is assumed that a farmer has only 30 acres of land for cultivation. The investment on it in the form of tubewells, machinery etc., (capital) is also fixed. Thus land and
capital with the farmer is fixed and labor is the variable resource.
•
• As the farmer increases units of labor from one to two to the amount of other fixed resources (land and capital), the marginal as well as average product increases. The total product also
increase at an increasing rate from 10 to 25 quintals. It is the stage of increasing returns.
•
• The stage of increasing returns with the employment of more labor does not last long. It is shown in the table that with the employment of 3rd labor at the farm, the marginal product
and the average product (AP) both fall but marginal product (MP) falls more speedily than the average product AP). The fall in MP and AP continues as more men are put on the farm.
•
• The decrease, however, remains positive up to the 7th labor employed. On the employment of 7th worker, the total production remains constant at 63 quintals. The marginal product is
zero. if more men are employed the marginal product becomes negative. It is the stage of negative returns. We here find the behavior of marginal product (MP). it shows three stages. In
the first stage, it increases, in the 2nd it continues to fall and in the 3rd stage it becomes negative.
•