HARYANA SCHOOL OF BUSINESS PRESENTETION :- MANAGRIAL ECONOMIC production function

GURU JAMBHESHWER SCIENCE & TECHNOLOGY UNIVERSITY ,HISSAR

“PRODUCTION IS THE TRANSFORMETION OF INPUT INTO OUTPAT “

WHAT IS PRODUCTION ????

PRODUCTION FUNCTION

“Production function is the relation between A firm’s production (output) and the material factor of production (input)”

_Watson

PRODUCTION FUNCATION

Total product (TP)Average product (AP)Marginal product (MP)

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In the Short Run the Plant Size is fixedTo increase production firms increase Labor but can’t expand their plant Labor Productivity

Short Run vs. Long Run

The short run is defined as the period of time when the plant size is fixed.

The long run is defined as the time period necessary to change the plant size.

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Plant size is fixed, labor is variable

Both Plant size and labor are variable

To increase production firms increase Labor but can’t expand their plant

To increase production firms can increase both: Plant size and Labor

• Total product is the total amount of goods and services product in a given period .

TOTAL PRODUCT

• Marginal product is the change in total product due to application of one more or less unit of variable factor .

MARGINAL PRODUCT

• A average production is per unit production of the variable factor .

AVERAGE PRODUCT

Three concept of production function

Returns to a factor : law of variable proportions

The law of variable proportion states that the input of one resources is increased by equal increment per unit of time while the inputs of other resources are held constant , total output will increases , but beyond some point the resulting output increases will become smaller and smallerleftwich

LAW OF PRODUCTION

ASSUMPTION OF LAW

The ratio which factor of production are combined can be

changed. units of variable factor are

homogeneous or equally efficient and are increased one by one. Thus diminishing returns start occurring not because latter unit of the variable factor are less efficient then the former once , but because fixity of the factor . State of technology does not change.

indivisibility of factors Change in factor ratioImperfect substitutes

Condition of applicability

• Increasing return to a factor :- increase return to factor sates as the proportion of one factor in a combination of factors is increased upto a point the, marginal productivity of the factor will increase.

Retunes to a factor

Y (A) TP Y (B) MPTOTAL (TP tends to increase mProduct at the increasing rate) MP tends to increase

Marginal Product O X O XUNIT OF VERIABLE FACTOR UNIT OF VERIABLE FACTOR

Increasing returns to a factor

Under utilisation of fixed factor Increase in efficiencyBetter coordination between the

factors

Cause of increasing returns to a factor

Constant returns to a factor occurs when additional application of the variable factor increases output only at a constant rate.

Y (A) TP Y (B) TOTALPRODUCT TP Increases at MARGINAL constant0 rate PRODUCT mp is consant MP

O X O X UNIT OF VARIABLE FACTOR UNIT OF VARIABLE FACTOR

Constant return to factor

Optimum utilisation of the fixed factor

Ideal factor ratioMost efficient of the utilisation of

variable factor

Couse Of constant returns to a factor

an increase amount of capital and labour applied in the cultivation of land cause , in general in a less then proportionate increase in the amount of product raised unless it happens to coincide with an improvement in the art of agriculture.

Diminishing return to a factor

Diminishing return to factor

TP Increase at diminishing rate finally it starts declining

TOTAL PRODUCT

UNIT OF VARIABLE FACTORUNIT OF VARIABLE FACTOR

MP declines to ultimatelyBecome zero or even negative

MP

ZERO- VE

Fixity of factor Imperfect factor substitutability Poor coordination between the

factors

CAUSE OF DIMINISHING RETURNS TO A FACTOR

THREE STAGES OF PRODUCTION

product

product

No. of laborers

STAGES TOTAL PRODUCT

MARGINAL PRODUCT

AVERAGE PRODUCT

1 STAGE Initially it increases at an increasing rate.Later at diminishing rate

Initially increases and reaches the maximum point. The starts decreasing

Increases and reaches at maximum point

2 STAGE Increasing at diminishing rate and reaches its maximum point

Decreases and becomes zero

After reaching its maximum beings to decreases

3 STAGE Begins to fall Become negative

Continues to diminish

THREE STAGES OF PRODUCTION

“The term return to scale refer to the change in output as all factor change by the same proportion ”

RETURN TO SCALE

P = f[L,K]

Increasing return to scale occur when a given percentage increase in all factor inputs cause proportionately grater increasing in output

INCREASING RETURNS TO SCALE

y Q 252015105 0 5 10 15 20 25 x% increase in all factor inputs

Increasing returns to scale

%Increase in output

Constant return to scale occurs when percentage increase in all factor input cause equal percentage increase in output

Constant returns to scale

y

Constant returns to scale

% increase in all factor inputs

% IncreaseIn output

Q2010

010 2

0X

Decreasing returns to scale occurs when given percentage increase in all factor inputs causes proportionately lesser increase in output.

DECREASING RETURNS TO SCALE

Y % increase in output 10 5 0 5 10 15 20 25 30 X % increase in all factor inputs

DECREASING RETURNS TO SCALE

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Increasing rate to scale refer to the situation in which increasing the scale of production reduces the unit cost of production or raises output per unit of the factor inputs.

Couse of increasing return to scale

internal economies of scale :- when a firm increases its scale of production it enjoys several economies. These economies are called internal economies.

real economies :- real economies are those which are associated with a reduction in the physical quantity of inputs raw materials various type of labour and various type of capital.

Real economies can be six type :-

Increasing return to scale

Labour economies or specialization Technical economies or indivisibility Inventory economiesSelling or marketing economiesManagerial economiesTransport and storage economies

External economies are those economies which are industry specific.

Economies of concentration Economies of information Economies of disintegration

External economies

Internal economies

Difficulties of large scale management

Co-ordination Supervision Operational efficiency

Diseconomies of scale

External diseconomies

Localisation Skilled

Presented by :- GURMEET SINGH & GORAV CHOBEY