Production

Producer’s
Behaviour
Production
• A producer or a firm requires
different inputs like labour,
machines, land, raw
materials, etc. By combining
these inputs in different
proportions, firms produce
out. This is called the process
of production.
• Production is a process of
value adding. In other words
production is also defined as
the transformation of input
• In terms of economics, simply we can say addition or
creation of utility is production.
• Fabric Transform Shirt
• Increase in utility = Increase in Value
• Transforming raw material into finished goods increase

utility of that product
Production is carried out by factors
(1)Factor Inputs: These factors include factors of production
such as land, labour, capital, and entrepreneurs. The prices
of these factors are rent, wage, interest and profit
respectively.
(a) Fixed Factors: inputs which do not change with the

change in output like land, machine, building.
(b) Variable Factors: which change with the change in
the level of output like labour.
(2) Non Factor Inputs: these factors include raw materials

Types or concepts of product
1. Total product: Overall output produced by employing
all the units of variable factor in combination with fixed
factors.
• TP = ∑MP or TP=AP x L (Variable factor)
2. Average Product: Total product per unit of variable

factor. Generally, labour is assumed as variable factor.
(Per Labour total product)
AP = TP/L
Types or concepts of product
3. Marginal Product: Net change in total product when
one more unit of variable factor is employed.
Or we can say, net change in TP when one more labour is

introduced.
MPn = TPn – TPn-1
Or
MPn =
Machin Labour Total Margin Averag
e produc al e
t produc produc
t t
2 5 90 18
2 6 100 10 16.67
Machin Labour Total Margin Averag
e produc al e
t produc produc
t t
2 4 75
2 5 90 15 18
2 6 100 10 16.67
Firm’s functional
relationship between
inputs used and quantum
of output produced by the
firm.
Production It expresses the maximum

quantity of output that can
Function be produced with any
given quantities of inputs.
Qx = f (L,K)
Concept of Time Period in
Production
1. Market Period or 2. Short Run
Very Short Period: period: It is the
It is the period of
time period in which
time during which
factors of production the producer can
cannot be changed at change only the
all. variable factors.
3. Long Run
Period: when Note- Short or Long
producer has run cannot be
enough time to defined in terms of
change both fixed days, months or
and variable years.
Technical relationship
between physical input and
physical output
Short Run Production
Production Function (at least one factor
Function remain constant)
Long Run Production Function
(all factors are variable)
• Technical name of short run
production function
(Law of Variable
Proportion)
• Technical name of Long run

production function
(Law of Returns to scale)

• Before
understanding LVP,
try to understand
the relationship
between Marginal
and Total.
Relationship between Average and
marginal
Labour Avg output Total Output Marginal
1 1 1 1
2 2 4 3
3 3 9 5
4 4 16 7

1 6 6 6
2 5 10 4
3 4 12 2
4 3 12 0
1 2 2 2
2 2 4 2
3 2 6 2
4 2 8 2
Law of Variable proportion
• This law relates to short run, in which to increase the production, only
variable factor can be increase.
• It states that It states that as more and more units of a variable factor
are employed with fixed factors the marginal product initially increases
then decreases and finally it becomes negative. Also called as returns
to factor or law of diminishing return
OR
• In terms of total product as more and more units of a variable factor are
employed with fixed factors. Total product increases at an increasing
rate in the beginning, then increases at a diminishing rate and finally
starts falling.
• As more and more units of
variable factor combines with
fixed factors.
• Initially MP increases
• Then MP decreases
• Finally, MP becomes
negative
• Law of variable proportion

means eventually MP will
decrease.
This Law may be explained with the help of following
schedule and diagram (hypothetical data)
Assumption
Technique of production remain same
All units of variable factor are equally efficient and
identical
Fixed and variable factor are complementary not
substitute.
Some factors must remain fixed.
Why MP first increases then
decreases
Better
Specialization Better co-
utilization of
of labour. ordination.
fixed factor
More labour
Fixed factor
MP decrease will lead to
are not
because: mismanageme
changing.
nt.

Production

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Producer’s

• Fabric Transform Shirt

• Increase in utility = Increase in Value

• Transforming raw material into finished goods increase

(a) Fixed Factors: inputs which do not change with the

(2) Non Factor Inputs: these factors include raw materials

• TP = ∑MP or TP=AP x L (Variable factor)

2. Average Product: Total product per unit of variable

Or we can say, net change in TP when one more labour is

MPn = TPn – TPn-1

Production It expresses the maximum

• Technical name of Long run

(Law of Returns to scale)

Labour Avg output Total Output Marginal

• Law of variable proportion

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