Production:

 Production means transforming inputs (Labour, Machines, Raw materials etc.) into an output.

 “Production is the process by which the resources (input) are transformed into a different and
more useful commodity. Various inputs are combined in different quantities to produce
various levels of output.”

Production Function

Input and Output:

 An input is a good or service that goes into the process of production. Land, Labour, Capital,
Management, Entrepreneur and Technology are classified as inputs.

 An output is any good or service that comes out of the production process.

Fixed Inputs

•A fixed input is defined as one whose quantity cannot be changed instantaneously in response to
changes in market conditions requiring an immediate change in output.
•E.g., Buildings, major capital equipments and managerial personnel.

Variable Inputs

•A variable input is one whose quantity can be changed readily when market condition suggests that
an immediate change in output is beneficial to the producer.
•E.g. raw materials and labour services.
Short Run

•The short run is that period of time in which quantity of one or more inputs remains fixed
irrespective of the volume of output.
•Therefore, if output is to be increased or decreased in the short run, change exclusively in the
quantity of variable inputs is to be made.

Long Run
•Long run refers to that period of time in which all inputs are variable.
•Thus, the producer does not feel constrained in any way while changing the output.
•In the long run it is possible for the producer to make output changes in the most advantageous way.

Production Function

 Production function is defined as “the functional relationship between physical inputs ( i.e.,
factors of production ) and physical outputs, i.e., the quantity of goods produced”.

 Production function may be expressed as under:

Q = f ( K,L)
 Where;

Q = Output of commodity per unit of time.

K = Capital.

L = Labour.

f = Functional Relationship.

 Production function depends on :

• Quantities of recourses used.

• State of technical knowledge.

• Possible process.

• Size of firms.

• Relative prices of factors of production.

• Combination of factors.

Laws of Production

 Laws of production are of two types:

 The law of variable proportions.

 Laws of returns to scale.

SHORT RUN PRODUCTION FUNCTION:

THE LAW OF VARIABLE PROPORTIONS/ THE LAW OF NON-PROPORTIONAL

RETURNS

Introduction:

The law of variable proportion is one of the fundamental laws of economics. It is the generalized
form of Law of Diminishing marginal return. The law of variable proportion is the study of short run
production function with some factors fixed and some factors variable.

In the short run the volume of production can be changed by altering variable factors only. In the
study of production function (variable proportion) the effect on output is examined by varying factor
proportions. When we increase the quantity of variable factors to the combination of fixed factor, the
proportion between fixed and variable factors change. The change in factor proportion and its effect
on output forms the subject- matter of the law of variable proportions.

Statement of the law:

The Law of Variable Proportions which is the new name of the famous law of Diminishing Returns
has been defined by Stigler in the following words:
"As equal increments of one input are added, the inputs of other productive services being held
constant, beyond a certain point, the resulting increments of produce will decrease i.e., the marginal
product will diminish".
 “The law of variable proportions states that when more and more units of the variable factor
are added to a given quantity of fixed factors, the total product may initially increase at an
increasing rate reach the maximum and then decline”.
 According to Prof. Benham, “As the proportion of one factor in a combination of factors is
increased, after a point, first the marginal and then the average product of that factor will
diminish”.
 The same idea has been expressed by Prof. Marshall in the following words “An increase in
the quantity of a variable factor added to fixed factors, at the end results in a less than
proportionate increase in the amount of product, given technical conditions.”

Assumptions of the Law:

The law of variable proportions also called the law of diminishing returns holds good under the
following assumptions:
(i) Short run. The law assumes short run situation. The time is too short for a firm to change the
quantity of fixed factors. All the, resources apart from this one variable, are held unchanged in
quantity and quality.
(ii) Constant technology. The law assumes that the technique of production remains unchanged
during production.

(iii) Homogeneous factors. Each factor unit in assumed to he identical in amount and
quality. (iv) The law is based on the possibility of varying the proportions in which the
various factors can be combined to produce a product.

Explanation of Law of variable proportion & some concepts.

Short run refers to a time period where some factors are variable while some other factors are fixed.
The variable factors are labour, raw materials etc. the fixed factors are land, capital etc.In a simple
production function, labour is the variable factor and capital is the fixed factor. In run there are three
main concepts of production.

 Total product (TP): The total amount of output resulting from a given production function.
In other words it is the output derived from all factors units, both fixed & variable employed
by the producer. It is also a sum of marginal output. TP=P×Q

 Average product (AP): Total product per unit of given input factor. It can be obtained by
dividing total output by the number of variable factors employed. AP=TP/Q
 Marginal product (MP): The change in total product per unit change in given input factor. It
is the output derived from the employment of an additional unit of variable factor unit.
MP=TPn−TPn-1= ΔTP/ΔQ
Explanation with Example

A hypothetical production schedule is worked out to explain the operation of the law. Fixed factors =
5 Acre of land. Variable factor = labor.

No .of Labour with TP AP MP STAGES OF PRODUCTION

fixed capital ratio
1:5 8 8 8 STAGE-I
2:5 20 10 12 INCREASING RETURNS
3:5 36 12 16
4:5 48 12 12 STAGE-II
5:5 55 11 8 DIMINSHING RETURNS
6:5 60 10 5
7:5 60 8.6 0
8:5 56 7 -4 STAGE-III
NAGATIVE RETURNS

Diagrammatic Presentation of the law:

Measures quantity of variable factors. Oy-axis measures output. In the diagram quantity of the
variable factor is increased. Total product rises at first, remains constant at point N, and then starts
falling. Average product and marginal product curves are represented by AP and MP. AP and MP
curve also rise and decline. MP curve starts declining earlier than the AP curve. The behaviour of
these total, average and marginal products of the variable factor as a result of the increase in its
amount is generally divided into three stages.
STAGE 1- THE LAW ON INCREASING RETURNS

 TP increases at an increasing rate up to a point F.

 MP also rises and is maximum at point F.

 AP goes on rising.

 After point F, TP rises but at diminishing rate.

 MP falls but is positive.

 Stage 1 ends where AP reaches its highest point.

STAGE 2- THE LAW OF DIMINSHING RETURNS

 TP continues to increase at a diminishing rate, until it reaches it maximum point H.

 Both MP and AP continuously fall during this stage.

 Stage ends when TP reaches its maximum point H.

SATGE -3 THE STATE OF NAGATIVE RETURNS

 TP declines.

 MP negative.

 AP is diminishing

SIGNIFICANCE/APPLICATION OF LAW OF VARIABLES PROPERTION:

 Empirical law, frequently observed in various production activities

 Particularly in agriculture where natural factors (say land), which play an important role, are
limited.

 Helps manager in identifying rational and irrational stages of operation

 It provides answers to questions such as:

 a) How much to produce?

 b) What number of workers (and other variable factors) to employ in order to maximize
output

 In our example, firm should employ a minimum of 4 workers and maximum of 7 workers
(where TP is still rising

 It is helpful in understanding clearly the process of production. It explains the input output
relations. We can find out by-how much the total product will increase as a result of an
increase in the inputs.

 The law tells us that the tendency of diminishing returns is found in all sectors of the
economy which may be agriculture or industry.
 The law tells us that any increase in the units of variable factor will lead to increase in the
total product at a diminishing rate. The elasticity of the substitution of the variable factor for
the fixed factor is not infinite.

CONCLUSION

 A rational producer will never produce in stage 3, where MP is negative.

 A rational producer will also not produce in stage 1, where the MP of fixed factor is negative.

 The producer producing in stage 1 will not be making best use of fixed factor and he will not
be utilizing fully the opportunity of increasing production by increasing quantity of variable
factor.

 A rational producer will produce in stage 2, where both MP and AP of variable factors are
diminishing