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    Theory of Production

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    Lakshita S
    The document discusses the theory of production, including the production function, concepts of total, average, and marginal product, and the law of variable proportions. It explains that under the law of variable proportions, as one variable input is increased while others stay fixed, marginal and then average product will diminish. This occurs in three stages: initially increasing returns, then decreasing returns, and finally negative returns. A rational producer will operate where marginal product is positive, in the stage of decreasing returns.

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    Theory of Production

    Uploaded by

    Lakshita S
    16 views14 pages
    The document discusses the theory of production, including the production function, concepts of total, average, and marginal product, and the law of variable proportions. It explains that under the law of variable proportions, as one variable input is increased while others stay fixed, marginal and then average product will diminish. This occurs in three stages: initially increasing returns, then decreasing returns, and finally negative returns. A rational producer will operate where marginal product is positive, in the stage of decreasing returns.

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    The document discusses the theory of production, including the production function, concepts of total, average, and marginal product, and the law of variable proportions. It explains that under the law of variable proportions, as one variable input is increased while others stay fixed, marginal and then average product will diminish. This occurs in three stages: initially increasing returns, then decreasing returns, and finally negative returns. A rational producer will operate where marginal product is positive, in the stage of decreasing returns.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    16 views14 pages

    Theory of Production

    Uploaded by

    Lakshita S
    The document discusses the theory of production, including the production function, concepts of total, average, and marginal product, and the law of variable proportions. It explains that under the law of variable proportions, as one variable input is increased while others stay fixed, marginal and then average product will diminish. This occurs in three stages: initially increasing returns, then decreasing returns, and finally negative returns. A rational producer will operate where marginal product is positive, in the stage of decreasing returns.

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    You are on page 1of 14

    Theory of

    Production
    Supply
    Cost of production

    • 1. Physical relationship between inputs and


    output.

    • Prices of inputs

    2
    Production Function – The relation
    between inputs and output of a firm
    Q = f(L, K , T)
    Short run PF – Q=f(L ,K)
    Long run PF – Q = f(L, K,)

    3
    Concepts of Production
    ✢ Total Product – TP of a factor is the amount of total
    output produced by a given amount of the factor,
    other factors held constant

    ✢ Average Product – AP is the total output produced


    per unit of the factor employed. Total Product /
    Number of unit of a factor employed

    ✢ Marginal Product – is the addition to the total


    production by the employment of an extra unit of a
    factor. Change in output / change in labor employed

    4
    Units of Total Marginal Average
    Concepts of Product
    labour Product Product Product

    1 80 80 80
    2 170 90 85
    3 270 100 90
    4 368 98 92
    5 430 62 86
    6 480 50 80
    7 504 24 72
    8 504 0 63
    9 495 -9 55
    10 480 -15 48 5
    Theories of Production
    ✢ Short run Theory – Law of Variable Proportions-
    studies the change in output due to the change in
    one variable factor example labor other factors
    remaining constant
    ✢ Also known as the law of diminishing returns

    ✢ Long run theory – Returns to scale-studies the impact


    on output when all factors of production are varied.
    In the long run all factors of production are variable

    6
    Law of Variable Proportion
    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”
    Paul A. Samuelson

    7
    ✢ As the proportion of one
    factor in a combination
    of factors is increased
    after a point first the
    marginal and then the
    average product of that
    factor will diminish
    ✢ Benham
    ✢ An increase in the labor
    and capital applied in the
    cultivation of land causes
    in general a less than
    proportionate increase in
    the amount of produce
    raised unless it happens
    to coincide with an
    improvement in the arts
    of agriculture
    ✢ Marshall
    ✢ Assumptions of the law of variable
    proportions
    ✢ 1. State of technology of constant
    ✢ 2. There should be some inputs whose
    quantity is fixed.
    ✢ 3.It should be possible to vary the proportion
    in which the different factors are combined
    to produce output
    Concepts
    labour
    Totalof Product
    Units of
    Product
    Marginal Average
    Product Product

    1 80 80 80
    2 170 90 85
    3 270 100 90
    4 368 98 92
    5 430 62 86
    6 480 50 80
    7 504 24 72
    8 504 0 63
    9 495 -9 55
    11
    10 480 -15 48
    Stages of The Law of variable
    Proportion

    12
    Stages of The Law of variable
    Proportion
    ✢ Causes for the different stages
    Stage I – increasing returns, fixed factor in abundance relative to
    the variable factor – because of indivisibility of fixed factor. Fixed
    factor will be more efficiently and intensively utilized. Secondly
    variable factor will also be also more fully utilized leading to greater
    productivity . MP of fixed factor negative
    Stage II – decreasing returns, fixed factor becomes inadequate
    relative to the variable factor- because of indivisibility of fixed
    factor, Factors of production are imperfect substitutes
    Stage III – negative returns, variable factor becomes too excessive
    relative to the fixed factor causing obstruction .MP of variable
    factor is negative

    13
    The Stage of Operation
    ✢Which stage will the rational
    producer chose to produce?
    ✢ Stage 1 the marginal product of fixed factor is
    negative and therefore it is beneficial for the
    producer to increase variable factor and get a
    higher return
    ✢ Stage 3 MP of Variable factor is negative so
    higher productivity obtained by reducing variable
    factor Stage I and 3 are known as regions of
    economic absurdity or economic nonsense.
    ✢ Stage 2 AP and MP of variable factor is positive
    though diminishing . Where exactly they will
    chose to produce depends on the prices of FOP

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