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    Theory of Production

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    Anwesha Karmakar
    The document discusses production functions and their characteristics in the short-run and long-run. [1] A production function shows the relationship between inputs like capital and labor and the output produced. [2] In the short-run, one input is fixed while another is variable, exhibiting diminishing returns. [3] In the long-run, all inputs are variable, and isoquants show different combinations of inputs producing the same output.

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    Theory of Production

    Uploaded by

    Anwesha Karmakar
    22 views13 pages
    The document discusses production functions and their characteristics in the short-run and long-run. [1] A production function shows the relationship between inputs like capital and labor and the output produced. [2] In the short-run, one input is fixed while another is variable, exhibiting diminishing returns. [3] In the long-run, all inputs are variable, and isoquants show different combinations of inputs producing the same output.

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    The document discusses production functions and their characteristics in the short-run and long-run. [1] A production function shows the relationship between inputs like capital and labor and the output produced. [2] In the short-run, one input is fixed while another is variable, exhibiting diminishing returns. [3] In the long-run, all inputs are variable, and isoquants show different combinations of inputs producing the same output.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    22 views13 pages

    Theory of Production

    Uploaded by

    Anwesha Karmakar
    The document discusses production functions and their characteristics in the short-run and long-run. [1] A production function shows the relationship between inputs like capital and labor and the output produced. [2] In the short-run, one input is fixed while another is variable, exhibiting diminishing returns. [3] In the long-run, all inputs are variable, and isoquants show different combinations of inputs producing the same output.

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    Theory of Production

    Swapan Chakraborty
    Production function

    • A production function exhibits the algebraic


    relationship between output and factors of
    production given by the technology
    Production function with two factors

    • Sometime a production function is represented as the


    relationship between output and factors, mainly
    capital and labour;
    Q = F( K ; L)
    • Short-Run : When at least one of the factors is fixed
    and rest are variable ; in two-inputs model capital is
    assumed to be fixed in the short-run; labour is
    variable.
    • Long-Run: All the factors of production are
    variable.
    Short-run Production function

    • Assuming labour to be variable factor and capital as


    fixed factor;

    • Marginal product of labour: Change in output due


    to the change in the amount of labour employed;

    • Average product of labour: Output produced


    per-unit of labour; reflects labour productivity;
    Short-run Production function

    • Law of diminishing returns: as additional units of a


    variable input are combined with a fixed input, after
    some point the additional output (i.e., marginal
    product) starts to diminish.

    • In our short-run two factors production function, law


    of diminishing return to the variable factor implies; as
    more and more labour are employed over fixed stock
    of capital; the additional output generated by extra
    labour will start falling or marginal productivity of
    labour starts declining.
    Short-run Production function: Numerical
    Example
    Short-run Production function: Graphical
    exposition
    Short-run production: Three stages of
    production
    • Three stages of production:
    • Stage I: When total product starting from zero
    reaches to a point where the Average product is
    maximum; such that AP =MP
    • Stage II: When Average product started declining till
    the point where marginal product is zero ;
    • Stage III: When marginal product is zero and
    thereafter;
    Short-run production: Three stages of
    production
    Short-run production: Three stages of
    production
    • In which stage should a profit maximizing(rational)
    firm operate?
    Any rational producer avoids the first as well as third stages of production. Therefore,
    producers prefer Stage II – the stage of diminishing returns. This stage is the most relevant
    stage of operation for a producer according to the law of variable proportions.
    Long Run production function

    • Assuming a production function of the form;

    When both capital and labour are variable.


    Characteristics:
    1. Marginal productivity of capital and labour are
    positive.
    2. Diminishing returns operate for both the factors.
    Long Run production function: Iso-quandts

    Definition: An Iso-quandt represents the locus of different


    points in the (K,L) plane such that total quantity of output
    produced along the curve remain same
    Long-run production function: Returns to scale

    • Returns to scale can also be described using the


    following equation

    hQ = f(kX, kY)

    if h > k then IRTS or IRS


    if h = k then CRTS or CRS
    if h < k then DRTS or DRS

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