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    Production Function: Dr. Paramasivan S Vellala Fellow, Nitie - Mumbai

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    Shrey Kaneria 8866
    This document provides an overview of production theory in microeconomics. It defines key concepts like the production function, factors of production, and factor pricing. It then explains the short-run and long-run production functions, and the laws of variable proportions and returns to scale. Specific topics covered include the Cobb-Douglas production function, isoquant curves, marginal rate of technical substitution, and the differences between economies of scale and economies of scope. Diagrams are provided to illustrate concepts like production functions under different returns to scale.

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    Production Function: Dr. Paramasivan S Vellala Fellow, Nitie - Mumbai

    Uploaded by

    Shrey Kaneria 8866
    44 views21 pages
    This document provides an overview of production theory in microeconomics. It defines key concepts like the production function, factors of production, and factor pricing. It then explains the short-run and long-run production functions, and the laws of variable proportions and returns to scale. Specific topics covered include the Cobb-Douglas production function, isoquant curves, marginal rate of technical substitution, and the differences between economies of scale and economies of scope. Diagrams are provided to illustrate concepts like production functions under different returns to scale.

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    PRODUC FUNCTION

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    This document provides an overview of production theory in microeconomics. It defines key concepts like the production function, factors of production, and factor pricing. It then explains the short-run and long-run production functions, and the laws of variable proportions and returns to scale. Specific topics covered include the Cobb-Douglas production function, isoquant curves, marginal rate of technical substitution, and the differences between economies of scale and economies of scope. Diagrams are provided to illustrate concepts like production functions under different returns to scale.

    Copyright:

    © All Rights Reserved
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    Download as pptx, pdf, or txt
    44 views21 pages

    Production Function: Dr. Paramasivan S Vellala Fellow, Nitie - Mumbai

    Uploaded by

    Shrey Kaneria 8866
    This document provides an overview of production theory in microeconomics. It defines key concepts like the production function, factors of production, and factor pricing. It then explains the short-run and long-run production functions, and the laws of variable proportions and returns to scale. Specific topics covered include the Cobb-Douglas production function, isoquant curves, marginal rate of technical substitution, and the differences between economies of scale and economies of scope. Diagrams are provided to illustrate concepts like production functions under different returns to scale.

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    PRODUCTION FUNCTION

    DR. PARAMASIVAN S VELLALA


    FELLOW, NITIE – MUMBAI
    PRESENTATION FLOW

    • The Link in Micro Economics


    • The Meaning, Significance
    • Production Function
    • The Short Run vs. The Long Run
    • The Law of Variable Proportion
    • The Laws of Returns to Scale – IRS, CRS and DRS
    • Economies of Scale vs. Economies of Scope
    THE LINK IN MICRO ECONOMICS

    Consumer
    Theory – Utlity
    Function &
    Demand
    Function

    Producers
    Market – Theory –
    Revenue MICRO Production
    & Profit Economics Function
    Function (Supply
    Function)

    Cost
    Theory –
    Cost
    Function
    PRODUCTION THEORY – MEANING AND
    SIGNIFICANCE
    • Production is the organized activity of transforming resources into finished products in
    the form of goods and services and the objective of production is to satisfy the demand of
    such transformed resources
    • Thus, production is nothing but creation of utilities in the form of goods and services.
    • FACTORS OF PRODUCTION: Production is facilitated by Factors of Production –
    Land, Labour, Capital and Entrepreneur
    • FACTOR PRICING: The process of rewarding the Factors of Product – Rent to Land,
    Wages to Labour, Interest to Capital and the residual – Profit to Entrepreneur
    PRODUCTION FUNCTION

    • Production Function explains the functions relationship between physical quantity of inputs and physical quantity of output. the maximum
    amount of output that can be produced with given quantities of inputs under a given state of technical knowledge in a specific period of time.
    • The production function can be algebraically expressed in the form of an equation in which the output is the dependent variable and inputs are
    the independent variables. The equation can be expressed as:
    Q = f (k,l,t, r……) k = Capital l = Labour r = Rawmaterials t = Technology)
    Cobb-Douglas production function is stated as: Cobb and Douglas are two American Economists. Empirical Study Q = ALa Kβ
    The equation tells that output depends directly on L and C, and the exponents of inputs, labour and capital \, measure their elasticities of
    output respectively. That part of output which cannot be explained by L and С is explained by A which is the ‘residual’, often called technical
    change.
    Assumptions: (1) Only two inputs (Labour and Capital) are considered (2) The firm operates on CRS (Constant Return to Scale)
    The production function solved by Cobb-Douglas had 1/4 contribution of capital to the increase in manufacturing industry
    OUTPUT and 3/4 of labour 
    SHORT RUN VS.LONG RUN PRODUCTION FUNCTION

    SHORT RUN PRODUCTION FUNCTION LONG RUN PRODUCTION FUNCTION


    • Meaning: A time period when there exist Variable Factor and
    Fixed Factor. Supply is normally inelastic • Time period when all the inputs can be changed.
    Supply is elastic
    • Production Capacity: Firms operate ill optima (below optimum).
    There is EXCESS CAPACITY • Firm can operate at optimum capacity – fuller
    • Scale cannot be changed utilisation of the plant is possible

    • Trade-off is NOT possible between factors • Scale can be changed

    • Law of Return to Factor operated • TRADE-OFF is possible between factors


    • (Law of Variable Prooportion or Law of Diminishing Return • Laws of Returns to Scale operate –
    (1 ) Increasing Return to Factor (IRF) (1) Increasing Return to Scale (IRS)
    (2) Diminishing Return to Factor (DRF) and
    (2) Constant Return to Scale and (CRS)
    (3) Negative Return to Factor (NRF)
    (3) Diminishing Return to Scale (DRS)
    THE LAW OF VARIABLE PROPORTION – SHORT
    RUN PRODUCTION FUNCTION
    • The law states that holding technology constant as we increase the quantity of variable input which is combined
    fixed inputs, initially the total product (TP) increases at an increasing rate up to the Point of Inflection (POI) and
    thereafter the TP increases at decreasing rate before the marginal physical productivity of the variable input
    eventually decline. In other words, an increase in a variable input like labour relative to other fixed input like
    capital will, in a given state of technology, cause output to increase; but after a point (Point of Inflexion) the extra
    output resulting from the same addition of extra input will become less and less. Mathematically,
    q=f[L, K̅ ] or q=f[L]
    • Total Product (TP) – Total Output (In a hypothetical two input situation when capital remains constant TP is
    computed as TP = l x q
    • Average Product (AP) – q/l
    • Marginal Product (MP) – d(q)/d(l) – An extra unit of output due to addition of 01 labour
    THE LAW OF VARIABLE PROPORTION

    STAGE – 1 IRF

    1.INDIVISIBILITY OF FF
    2.EFFICIENCY OF VF
    3.DIVISION OF LABOUR
    4. BETTER FACTOR COM

    STAGE -2 DRF

    1. Factor combination between FF and


    VF disturbed.

    2. INDIVISIBILITY OF FF

    3. IMPERFECT SUBSTITUTABILITY
    OF FACTOS

    STAGE 3 NRF

    Excessive addition of VF to FF
    LONG RUN PRODUCTION FUNCTION – PRODUCTION
    FUNCTION WITH TWO VARIABLE INPUTS
    • Long Run refers to a time period where all inputs can be varied and the firms aims at
    achieving the returns to scale i.e. doubling of output faster than doubling of inputs.
    • Three different laws of returns to scale operate
    • Increasing Returns to Scale: - IRS – If output more than doubles when all inputs are doubled,
    IRS sets in.
    • Constant Returns to Scale – CRS – If output doubles when all inputs are doubled, CRS sets in.
    • Diminishing Returns to Scale – DRS – If output less than doubles when all inputs are
    doubled, DRS sets in.
    ISO – QUANT CURVE – OUTPUT CURVE

    • Iso means equal and iso quant mean equal product curve which is a downward sloping
    curve showing different combinations of two different inputs that can produce a given
    amount of output in a given state of technology.
    • It has a negative slope
    • It is convex to origin
    • Two iso quant curves cannot intersect each other
    • Higher the iso quant curve higher the output
    ISO QUANT CURVE
    WHY ISO-QUANT CURVE HAS A NEGATIVE
    SLOPE?
    HOW TO CALCULATE MRTS ?

    MRTS IS CHANGE IN CAPITAL TO CHANGE IN LABOUR


    MRTS – A MATHEMATICAL EXPLANATION

    • MRTS is the slope of iso-quant curve. Symbolically,


    MRTS = K/ L = L x MPL + K x MPK = 0
    In other words
    MRTS is negative ratio of Marginal Product of Labour to Marginal Product of Capital
    and therefore, MRTS diminishes
    TWO DISTINCTIVE CASES OF PRODUCTION
    FUNCTION
    • (1) PRODUCTION FUNCTION WHEN TWO INPUTS ARE PERFECT
    SUBSTITUTES
    This is a special case where capital is perfect substitute to labour. In this case the
    MRTS is constant and the iso-quant is linear

    (2) FIXED PROPORTION PRODUCTION FUNCTDION


    Production Function with L shaped iso-quant so that only one combination of
    capital and labour can be used to produce each level of output
    ISO-QUANT WITH PERFECTLY SUBSTITUTABLE
    INPUTS - LINEAR
    NON SUBSTITUTABLE INPUTS –
    LEONTIFF PRODUCTION FUNCTION
    PANEL OF GRAPHS SHOWING LONG RUN PRODUCTION
    FUNCTION - (A-CRS B – IRS C –DRS)
    ECONOMIES TO SCALE VS ECONOMIES OF
    SCOPE
    • When input proportions change the firm’s expansion path is no longer straight line and the
    concept of returns to scale no longer applies.
    • The firms enjoys economies to scale when it can double its output for less than doubling its cost
    and the diseconomies to scale will set in when doubling of output requires more than twice the
    cost
    • Economies of Scope presents when the joint output of a single firm is greater than the output
    that could be achieved with two firms each producing a single product. Symbolically
    SC = C(q1) + C(q2) – C(q1+q2)/C(q1+q2)
    • If SC > 0, Economies of Scope exist. If SC is negative diseconomies of scope exist.
    • Larger the value of SC greater the Economies of Scope
    REFEENCES…

    • Ahuja H.L., Managerial Economics: Analysis of Managerial Decision Making, S Chand


    • Pindyck S Robert, Daniel L Rubinfeld, Prem L Mehta Micro Economics, pearson
    •THANK YOU

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