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Production Function
by
Balaji K
2
Overview What is a Production Function Importance & Uses of Production Function Linear Homogeneous Production Function Cobb Douglas Production Function Isoquants and its assumptions Marginal rate of substitution Laws of Production
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Production Function
Input process output Q=fn(a,b,c and d) Q=Quantity /output and a,b,c and d are inputs
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Importance of Production Function
D
Helps to estimate the level of Production. It becomes Isoquants It helps in the input substitution process
without altering the total output Price determination and choosing the
least combination of inputs
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Uses of Production Function
D
How to obtain Maximum output Helps the producers to determine
whether employing variable inputs /costs are profitable
Highly useful in longrun decisions Least cost combination of inputs and
to produce an output
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Table showing Production Function
D
1 2 3 4 5 6
6 688 892 1188 1764 1530 1668
5 276 898 234 556 1390 1188
4 226 334 556 688 1435 1345
3 278 688 335 225 667 556
2 556 1345 688 444 1123 456
1 342 876 765 334 234 688
Input of Labour
Input of capital
Output Q per unit of time
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Assumptions
The production function is related to particular period of time
There is no change in technology The producer is using the best technique Production can be fitted to both short run and the long
run
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Isoquants
The term isoquants is derived from the words ‘iso’ and ‘quant’.Iso means and quant means quantity
In other words Isoquants are the curves which represent the different combinations of inputs producing a particular quantity of output.
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Assumptions of Isoquants
There are only two factors of Production Viz Labour and Capital
Two factors can substitute each other upto a certain limit.
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Properties of Isoquants
Always slope downwards from left to right Apply MRTS Perfect Subsitutes Do not intersect each other Higher isoquants represents higher outputs
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Isoquants with an Illustration
Combinations Labour(Units) Capital(Units) Output(quintals)
A 1 10 50
B 2 7 50
C 3 4 50
D 4 2 50
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Graphical representation of Isoquants
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Producers Equilibrium
The producer is in equlibrium when he secures maximum output with the least cost combination of factors of production.
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Computation of least cost combination of two inputs
X1 X2 3X1 4X2 Cost (Rs)
10 45 30 180 210
20 28 60 112 172
30 16 90 64 154
40 12 120 48 168
50 8 150 32 182
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Thank You
Complements (-) vs Substitutes (+)
defined by sign of cross price elasticity