APROJECT ON “THE THEORY OF PRODUCTION” ECONOMICS- (I) SUBMITTED TO: SUBMITTED BY: DR. TOPAN PATRA GANESH OJHA FACULTY OF ECONOMICS BA. LLB CUSB 2ND SEMESTER ROLL- CUSB1612125017 0 PRODUCTION FUNCTION WITH ONE VARIABLE FACTOR 4 2.2.1. CHAPTERISATION S. BIBLIOGRAPHY 14 1 .1. FACTORS AFFECTING THE STUDY 3 2.3. 1.2.1.2.2. MARGINAL RATE OF TECHNICAL SUBSTITUTION 8 2.2. CHAPTERS Pg. OBJECTIVE OF THE STUDY 2 1.1.1. INTRODUCTION 2 1. SUMMARY AND CONCLUSION 13 4. METHODOLOGY 2 1.2. No. THREE STAGES OF PRODUCTION 6 2.1. RETURN TO SCALE 10 3. PRODUCTION FUNCTION WITH TWO VARIABLE FACTORS 7 2. LAW OF VARIABLE PROPORTIONS 5 2.3.2. ISOQUANTS 7 2.1. PRODUCTION FUNCTION 4 2.3. DIFFERENT PHYSICAL PRODUCTS 4 2. No. It is the economist’s summary of technological knowledge. Long-Run Production Function OBJECTIVE OF THE STUDY The objective of the study of production function is concerned to minimize the cost of production for producing a given level of output or to maximize output for a given level of cost. Production function can be studied in two ways depending upon the nature of factors involved as: 1. inputs). it is creation or addition of value. Short-Run Production Function 2. METHODOLOGY Production function can be represented in various form.e. showing the maximum quantity of output that a firm can produce per period of time with various combinations of factors (i. INTRODUCTION The production function is the name given to the relationship between the rates of inputs of productive services and the rate of output of product.. It can be represented by tables. The word production in economics is not merely confined to effecting physical transformation in the matter. expresses a flow of inputs resulting in a flow of output in a specific period of time. 2 . Production function can be represented by input-output tables as well as isoquants when two factors needed to be shown. graphs. mathematical equations. Production function considered with reference to a particular period of time. the production function changes with the result that the new production can yield grater flow of output from the given inputs. or smaller quantities of inputs can be used for producing a given quantity of output. Technology. Period of time.production function expresses a flow of inputs resulting in a flow of output in a specific period of time. 2. FACTORS AFFECTING THE STUDY Production function can differ with: 1.when there is advancement in technology. 3 . MP= dQ/dL 4 . K) DIFFERENT PHYSICAL PRODUCTS: 1. Average physical product of labor (AP) = Q(total output)/L(quantity of labor) 3. fixed. raw materials are increased to expand output. Total Product (TP): The total product of a variable factor is the amount of total output produced by a given quantity of the variable factor. Average Product (AP): Average product of a variable factor (labor) is the total output (Q) divided by the amount of labor employed with a given quantity of capital (fixed factor) used to produce a commodity. land remain fixed and factors such as labor. The concept of returns to a variable factor is relevant for the short run as capital. The short-run two factor production function can be written as: Q= f(L. PRODUCTION FUNCTION WITH ONE VARIABLE FACTOR The production function when the quantities of some inputs are kept constant and the quantity of one input (or quantities of few inputs) are varied. Marginal Product (MP): It means the contribution of extra unit of output from extra unit of variable. 2. machines. keeping the quantity of other factors such as capital. Assumptions of the Law: 1.. the marginal products will diminish. --“an increase in some inputs relative to other fixed inputs will.LAW OF VARIABLE PROPORTIONS: The law of variable proportions or law of diminishing proportion states.” According to Samuelson. 3. i.” Law of variable proportion examines the production function with one factor variable. in a given state of technology. 5 . keeping the quantities of other factors fixed and refers to the input-output relation when output is increased by varying the quantity of one input. beyond a certain point the resulting increments of product will decrease. Products must require the variable proportion of factors. but after a point the extra output resulting from the same additions of extra inputs will become less sand less. “As equal increments of one input are added. 2.e. the inputs of other productive services being held constant. causes output to increase. Technology is constant. Capital must be kept fixed. it is called the stage of diminishing returns. marginal physical product and average physical product keep on decreasing. Fixed factor are scarce and variable factors are in 6 . Therefore. Average product curve continue to rise through the first stage. it is called the stage of increasing return. STAGE2: In stage 2. he will produce till stage 2. no rational producer will stop the production at the end of stage 1. fixed factor is more than variable factor relatively. Since average physical product rises throughout the stage 1. therefore.THREE STAGES OF PRODUCTION STAGE1: In stage 1. Therefore. variable factor is too much relative to the fixed factor. Different isoquants give different output 7 . Downwards sloping curve 3. This state is called the stage of negative returns since the marginal product of the variable factor is negative during this stage. STAGE3: In stage 3. These are downward sloping curves and factors of production are imperfectly substitute to each other. Convex to origin 4. Stage 2 is very crucial and important because the firm will seek to produce in its range. total product declines and therefore the total product curve slopes downward. Two isoquants don’t intersect each other. 2. PRODUCTION FUNCTION WITH TWO VARIABLE FACTOR ISOQUANTS: Isoquants refer to the combination of two inputs that will produce the same level of output. In this stage. It is known as equal product curve.abundant. Isoquants have four properties: 1. thus variable factor could not be utilized. Slope of isoquant curve= dK/dL MARGINAL RATE OF TECHNICAL SUBSTITUTION: Marginal rate of technical substitution is the rate at which the producer will substitute labour for capital to produce the same level of output.Marginal rate of technical substitution is the slope for the isoquant curve. 8 . Slope of isoquant curve= dK/dL 9 .Marginal rate of technical substitution is the slope for the isoquant curve. CRS : It is a property of production function that holds when a proportional increase in all inputs results in an increase in output by the same proportion.RETURN TO SCALE: Return to scale refers how we expend or change the output by changing the amount of all the inputs. It is called linear homogeneous production function. 2⋅Q F=(2⋅k. For example: when we double all inputs. (i) CRS (Constant Return to Scale) (ii) IRS ( Increasing Return to Scale) (iii) DRS ( Decreasing Return to Scale) 1.2⋅L) 2. 10 . IRS: It holds when a proportional increase in all inputs results in an increase in output by more than the proportion. It is also called linear homogeneous production function or homogeneous production function at the first degree. For example. output is exactly doubled. 2⋅Q F>(2⋅k. output is less than doubled. In DRS.2⋅L) 11 .2⋅L) 3. DRS: It holds when a proportional increase in all inputs results in an increase in output by less than the proportion. the distance between two isoquants gets larger. For example: when we double all inputs. The production of output requires larger and larger amount of inputs. 2⋅Q F<(2⋅k. The physical relationship between inputs and output plays an important part in determining the cost of production. SUMMARY AND CONCLUSION Some important problems encountered in the production function studies are very important. This may cause some error in the estimation of production function. 12 . the actual data used for measurement of production function may not actually represent he efficient input combinations. Production function theoretically includes only technically efficient combinations of inputs and output. It is the general description of this physical relation between inputs and output which forms the subject matter of the theory of production. ECONOMICS. S. WWW.ORG 13 . ADVANCED ECONOMY THEORY (MICROECONOMIC ANALYSIS). CHAND. H. DR. BIBLIOGRAPHY BOOKS REFERRED:- 1. EDITION 2014.L.AHUJA. ONLINE RESOURCES:- 1.