Production Analysis

Introduction:

Production is a significant economic activity that meets the requirements and wants of the
population. The link between the inputs used and the output produced is highlighted by the production
function. A company is an organization that combines and processes resources to produce output that
will meet the needs of the consumer. To create effectively, the company must select how much output
to produce and how much input (labor and capital) to use. This chapter aids in understanding the
collection of requirements for an organization's productive output.

Factors of production comprise the inputs of resources utilized to create products and services. The four
main categories used by economists to classify input components are land, labor, capital, and
organization.

Land: In nature, the land is diversified. Land is a fixed supply and a constant factor of production, but it
can only be productive when both labor and capital are used.

Labour: Although the availability of labor is inelastic by nature, it can be improved due to differences in
productivity and efficiency.

Capital: is a movable, man-made component, yet the supply is elastic.

Organization: The organization takes risks as well as plans, monitors, organizes, and regulates the
commercial activity.

Production Function

The greatest quantity of commodity "X" that may be produced from different combinations of input
elements is shown by the production function. It determines how much of the minimal input must be
used in order to achieve the maximum output from a given level of input. The production process takes
for granted that technology is in a fixed state. A shift in technology would also affect how production is
carried out.

Q = f (Land, Labour, Capital, Organization)

Q = f (L, L, C, O)

The task of selecting the ideal mixture of inputs for the predetermined output quantity falls to the
production manager. He must be aware of the cost of the input elements and the organization's budget
allocation in his capacity as manager. Any corporate organization's main goal is to maximize output
while incurring the fewest expenses. The company must effectively utilize the input components if it is
to produce the maximum output. On the long run, the objective cannot be accomplished without
increasing the fixed factors. Therefore, it's critical to comprehend the short- and long-term relationships
between input and output in every industrial process.
Cobb Douglas Production Function:

This function establishes the greatest output that can be generated with a particular level of inputs.
Assume for the moment that all production inputs can be divided into two categories, such as labor.

(L) and capital (K).The general equilibrium for the production function is Q = f (K, L)

To describe production, there are numerous functional forms accessible. Cobb-Douglas production
function (quadratic equation) is frequently employed in general.

Q = A Kα Lβ

Q = maximum output for a specific rate of capital (K) and labor (L) (L).

Short Run Production Function:

Some inputs (land and capital) have fixed quantities in the short term. The amount of other variable
inputs used determines the outcome. The production function, for instance, demonstrates how much
the output changes when the variable input (labour) is changed. Some input factors are fixed, which
presents a challenge to producers in the short term. The businesses have the option of making
employees work longer shifts and purchasing additional raw materials. Then, labor and raw materials
are seen as variables in the production process. The size of the structure and the number of machines,
however, are set. As a result, it has limitations while trying to produce additional things.

All input factors are variable over the long term. The producer has the option to hire more personnel,
buy more equipment, and utilize more raw materials. At first, there will be a slight increase in output per
worker. This is known as the Law of Diminishing Returns or the Law of Variable Proportion.
Understanding the fundamental principles of production is necessary to comprehend the law of
diminishing returns.

Measures Of Productivity

Total production (TP): the highest level of output possible given a certain amount of input.

Average Production (AP): output produced per unit of input AP = Q/L

Marginal Production (MP): the variation in overall output brought about by the final unit of an input

Marginal production of labour = Q / L (i.e. change in the quantity produced to a given change in the
labour)

Marginal production of capital = Q / K (i.e., the ratio of a change in the capital to a change in the
quantity produced)
Production Function:

A production function can be expressed and analyzed using any one or more of the three tools—a
table, a graph, or an equation—just like any other function. The table provides the greatest output
quantities that can be obtained from various alternate combinations of input elements.

The production function expressed in tabular form is as follows.

There are certain fixed variables in the company. As long as that holds true, the labor force will
increase from 1 unit to 10 units. Up to a point, a rise in the input factor causes an increase in the output.
After that, it starts to fall off. In the beginning, marginal production rises; after that, it starts to fall and
turn negative. If the firm's marginal production is zero, which is the greatest output that can be
produced with the fixed factors currently available, then it should stop hiring more employees. The
ninth laborer does not produce anything. If the company wishes to produce more than 153 units, it must
improve its fixed variable. That implies that investing in new equipment or structures is necessary. The
company is aware that, given the specified combination of input factors, the maximum output is 153
units.

The Law Of Diminishing Returns

When one particular input factor is continuously increased without affecting the other input factors,
the output will increase in a declining manner. Let's imagine that someone studying for an exam does so
continually, without taking any breaks. The output, or understanding and covering of the curriculum, will
occur earlier rather than later in the learning process. The amount to which one factor of production can
be replaced by another has a limit. The addition of the input element increases overall production to a
point where it becomes saturated or the output doesn't change, which further has a negative impact on
the output. That indicates that the marginal production gradually decreases until it reaches zero and
turns negative. The maximum output of the company with the specified set of input factors is when the
MP reaches a value of zero. This law is applicable to all aspects of human and commercial activity.

For instance, a company might create a maximum of 14 pairs of curtains every day using two sewing
machines and two tailors. The machines are only used from 9 AM until 5 PM, after which they are left
idle. As a result, the company hires 2 more tailors for the second shift, increasing production to 28 units.
The output will then reach 30 units after two more workers are added to help these individuals. Since
the marginal productivity of the additional two employees is zero, there won't be any change in their
output when they are hired. The overall production has not increased. Therefore, hiring two more
tailors would be pointless. There is a limit to how much can be produced from a fixed input, but over the
long term, the purchase of only one more sewing machine will enable the company to grow production
by more than 30 units.

The Law Of Returns To Scale

Long-term changes will affect both the variable factors, such as labor, raw materials, and other
factors, as well as the fixed inputs, such as machinery, buildings, and other elements. Many different
permutations of returns occur in an organization when input components are increased by an equal
percentage.

Returns to scale: the shift in output's % caused by a shift in all production factors' percentages. Returns
on scale are rising, steady, and diminishing.

Increasing returns to scale may arise: if a company's output grows more quickly than all of its inputs
combined. For instance, the output has doubled (100%), yet the input factors have grown by 50%.

Constant returns to scale: The output rises by the same proportion when all inputs are increased by a
specific amount. As an illustration, if input factors are raised by 50%, the output has also increased by
50%. Let's say a laptop has 50 parts, which we will refer to as a set. The company can construct 100
computers if they obtain 100 sets, but they are unable to make any more than that number.

Diminishing returns to scale: Distinguishing return to scale occurs when output growth is less
pronounced than input growth. For instance, a 50% increase in input variables only resulted in a 20%
increase in output.

The graph below shows the average production curve, the marginal production curve, and the total
production curve (AP). There are three stages; let's examine each level in terms of returns to scale.

Stage I: The whole output grew at an increasing rate. This stage, in which the total product, marginal
product, and average production are all rising, is known as the growing stage.
 Stage II: Up to the next stage, the overall production keeps growing, although at a slower rate.
Average and marginal products are improving yet on the decline. At the conclusion of the second stage,
the total production is at its highest level with a zero marginal product.

Stage III: In the third stage, marginal product turns negative as overall production drops.
Additionally, there was a drop in average productivity. Which suggests that as a result of the change in
input components, both average and marginal production have decreased.

The well-known law of variable proportions is used in economics to show the production function
with a single variable input. The production function or input-output relationship is depicted in the
graph below with one factor variable while the other production factors are held constant. A production
function with two variable inputs can be understood as, it is necessary know the concept iso-quant or
iso-product curve.

ISO-Quants

The isoquant curve is used to comprehend the production function with two variable inputs. These
curves demonstrate many ways that two different inputs can be combined to produce the same level of
output. An isoquant's form illustrates how easily a producer can switch out inputs while retaining the
same amount of output. We can see from the graph that different combinations of labor and capital
were used to construct 100 motor pumps, as indicated by the iso-quant curve. Any point along the
curve, including points a and b, reflects the same level of production. The revised iso-quant curve for
200 units (Q1) is moved upward because it is certain that if production increases to 200 or 300 units, the
input usage will likewise increase. The term "isoquant map" refers to a collection of iso-quant curves
displayed in a graph.

Iso-cost: many combinations of inputs that can be purchased for a specific budget.

Optimal input combination: The ideal input combination at various activity levels is represented by the
points of tangency between the iso quant and iso cost curves.

Expansion path: Optimal input combinations as production scale increases. The graph makes it evident
that the best combination is chosen based on the points where the budget line and the iso-quantity, or
letters a and b, tangent to each other. The point "a" suggests that OC and OM, which are within the
budget, are the best combination of capital and labor to make 100 units of motor. If we connect all the
elements, we can determine the expansion path that a firm will take throughout time. A firm will
experience several optimum levels.

Managerial Uses Of Production Function:

Production processes are sensible and practical. Because they may provide advise on how to get the
most output from a given set of inputs and how to get a given result from the least aggregation of
inputs, production analysis can be utilized as a decision-making tool. Computer-based programs are
used to assess the intricate industrial processes with numerous inputs and outputs.