Production Function
1. Production Function : It is the functional /technological relationship between physical inputs
and physical outputs.
Qx= f( L,K) Where, Qx is the output L = labour and K = Capital
Note: Production function does not establish any economic relation between inputs
and outputs, establishes technical relation between input and otput
2. Factors of production are classified as
a) Fixed factors: it refers to those factors of production which can not be changed in
short run.
b) Variable factors: refer to those factors of production which can be changed in teh
short run.
3. Difference between fixed factors and variable factors:
Fixed Factors Variable Factors
1. Fixed factors refer to those 1. Variable factors refer to those
factors which cannot be factors that can be changed in
changed in the short run. the short run
2. Fixed factors do not change 2. Variable factors change directly
directly with the level of with the level of output.
output. 3. For eg : Plant and machinery,
3. For example: Raw Permanent staff
material ,labour
4. Production function can be studies in two phases
a) Short run production function: It refers to the period in which output changes
only by changing variable factor.
b) Long run function: It refers to a period in which output can be changed by
changing all factors of production.
5. Difference between short run and long run
Short Run Long Run
1.It is a production function in which 1.It refers to a period in which output can be
output changes only by changing variable changed by changing all factors of production
factor.
2. In Long run factor ratio does not change
2. In short run factor ratio tends to change with the change in the volume of output.
with change in the volume of output.
3. Scale of output changes with the change
3. Scale of output remains constant,
In the level of output.
irrespective of level of output
4. It is known as returns to scale
4. It is known as returns to factors
5. For eg: 40x=f(5L,4K)
5. For eg: 40x=f(5L,4K)
80x=f(10L,8K)
45x=f( 6L,4K)
6.
6. Y Y
capital
capital
X
Labour X
Labour
6. Total Physical Product: TP is the sum total of output of each unit of variable factor.
This is also called total return of the variable factor.
TPn =∑MP or TP/ Q
1----n
7. Marginal PhysicalProduct: MP refers to the additional product derived by the
additional unit of variable factor.
MPn= TPn-TPn-1
8. Average Physical Product: refers to output per unit of the variable factor.
AP= TP/L Where L = units of variable factor
9. Law of Variable proportion :
Assumptions: 1. Fixed factors remain constant and production changes by increasing
2. The factor ratio changes
3. Technology remains constant
4. The factors employed are equally efficient
Statement: This law states that as more and more of variable factor is combined with
fixed factor the marginal product will first increase reaches maximum ,declines
reaches zero and thereafter negative.
Schedule:
Units of Units of VF Marginal Product Total Product
land/FF
1 1 2 2 MP TP increases
1 2 3 I stage 5 at increasing rate
1 3 4 increasing return 9
1 4 3 II stage 12 MP TP increases at
1 5 2 diminishing return 14 diminishing rate
1 6 1 15
1 7 0 15 MP=0, TP maximum
And constant
1 8 -1 III stage 14 MP –ve, TP fall
Negative returns
Expalnation :
Stage I: Increasing Returns: -This phase begins from the origin, when MP increases and ends where MP
is maximum. TP is increasing at increasing rate in this phase. The end of phase I is known as ‘point of
inflexion’. It is the point where MP reaches it’s maximum and slope of TP changes from increasing to
diminishing. Producer produces in this stage.
Stage II: Diminishing Returns: This phase begins from the point where MP is maximum, and ends where
MP is zero. From the beginning of the phase 2 TP increase at diminishing rate and reaches at a point
where TP is constant and maximum. Producer produces in this stage.
Stage III: Negative returns: It starts from a point where MP is zero and thereafter MP becomes
negative.TP during this phase falls
10. Relationship between TP and MP( same graph of Law of variable proportion to be followed)
1. When MP increases, TP increases at increasing rate
2. When MP decreases , TP increases at diminishing rate
3. When MP is zero, TP is maximum and constant.
4. When MP is negative, TP will fall.
5. TPn =∑MP
1----n
6. MPn= TPn-TPn-1
11. Relationship between AP and MP
1. When AP increases, MP is greater than AP, MP lies above AP, MP increases at faster rate than
AP.
2. When AP Decreases, MP is smaller than AP, MP lies below AP, AP increases at faster rate than
MP.
3. When AP = MP, MP is maximum.
4. AP= TP/units of variable factor.
