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The document discusses the production function, highlighting the differences between short run and long run production, as well as variable and fixed factors. It explains the types of production functions, the concept of product, and the law of variable proportion, detailing its phases and the relationship between total product, average product, and marginal product. Additionally, it outlines the reasons for the phases of increasing, diminishing, and negative returns to factors in production.

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9 views6 pages

Untitled Document

The document discusses the production function, highlighting the differences between short run and long run production, as well as variable and fixed factors. It explains the types of production functions, the concept of product, and the law of variable proportion, detailing its phases and the relationship between total product, average product, and marginal product. Additionally, it outlines the reasons for the phases of increasing, diminishing, and negative returns to factors in production.

Uploaded by

lakshmibiju1605
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Production refers to the transformation of inputs into output.

Here are the notes


of the chapter ‘Production Function’.

Production Function
The production function is an expression of the technological relation between
physical inputs and output of a good.

Difference between Short Run and Long


Run
Basis Short Run Long Run

Meaning Short run refers to a period in The long run refers to a


which output can be changed period in which output
by changing only variable can be changed by
factors. changing all factors of
production.

Classification Factors are classified as All factors are variable in


variable and fixed factors in the the long run.
short run.

Price In the short run, demand is In the long run, both


Determinatio more active in price demand and supply play
n determination as supply cannot an equal role in price
be increased immediately with determination as both
an increase in demand. can be increased.
Difference between Variable factors and
Fixed factors
Basis Variable Factors Fixed Factors

Meanin Variable factors refer to those Fixed factors refer to those


g factors which can be changed factors which can not be
in the short run. changed in the short run.

Relatio They vary directly with the They do not vary directly with
n with output. output.
Output

Exampl Raw material, casual labor, Building, plant and machinery,


e power, fuel, etc. permanent staff, etc.

Types of Production Functions

Short Run Production Function

Short-run production function refers to a situation when output is increased by


changing only one input while keeping other inputs unchanged.

Long Run Production Function

Long-run production function refers to a situation when output is increased by


increasing all the inputs simultaneously and in the same proportion.
Concept of Product
Product refers to the volume of goods produced by a firm during a specified
period.

●​ Total Product (TP): It refers to the total quantity of goods produced


by a firm during a given period.
●​ Average Product (AP): It refers to the output per unit of variable
inputs.
●​ Marginal Product (MP): It refers to the additional to total output
where one more unit of variable factor is employed.

Law of Variable Proportion


The law of variable proportion states that as we increase the quantity of only one
input keeping other inputs fixed, the total product(TP) initially increases at an
increasing rate, then at a decreasing rate, and finally at a negative rate.

Fixed Factor Variable Factor TP MP Remarks

1 1 10 10 Increasing Return

1 2 30 20 Increasing Return

1 3 45 15 Diminishing Return

1 4 52 7 Diminishing Return

1 5 52 0 Diminishing Return
1 6 48 -4 Negative Return

Schedule for Law of Variable Proportions

Curve for the Law of Variable Proportions


Assumptions of the Law of Variable Proportion

●​ LVP always operates in the short run.


●​ This law applies to the field of production only.
●​ The effect of change in output due to change in variable factors can
be easily determined.

Phases of LVP

There are 3 phases of LVP:

1) Increasing Returns to Factor


In the first phase, every additional variable factor adds more and more to the total
output, which means TP increases at an increasing rate and MP also rises.

2) Diminishing Returns to Factor


In the second phase, an additional variable factor adds less amount of output. It
means TP increases at a diminishing rate and MP starts falling.

3) Negative Returns to Factor


It is the third phase of LVP in which the employment of an additional variable
factor causes TP to decline and MP becomes negative therefore, this phase is
known as the negative return.

Reasons for LVP Phases

Reasons for Increasing Return to Factor


●​ Better Utilization of Fixed Factor: In the first phase, the supply of
the fixed factor is too large, whereas variable factors are too low. So,
with an additional variable factor, the fixed factor is better utilized,
and output increases at an increasing rate.
●​ Increased Efficiency of Variable Factor: When variable factors are
increased and combined with fixed factors, there is great cooperation
and a high degree of specialization. As a result, variable factors work
efficiently.

Reasons for Diminishing Return to a Factor


●​ The optimum combination of factors: After making the optimum
use, MP begins to diminish.
●​ Imperfect Substitutes: Diminishing returns occur because fixed and
variable factors become imperfect substitutes for each other. There is
a limit for which these can be substituted with one another. After that
limit, they become imperfect substitutes which leads to diminishing
returns.
Negative Returns to Factors
●​ Limitation of Fixed Factor: The negative return applies because
some factors of production are fixed and cannot be increased in the
short run.
●​ Poor Coordination between Variable and Fixed Factors: When
Variable factors become too excessive about fixed factors, they then
become obstructed with each other which leads to poor coordination.

Relationship between TP and MP


●​ As long as TP increases at an increasing rate, MP also increases.
●​ When TP increases at a diminishing rate, MP decreases.
●​ When TP reaches its minimum point, MP becomes zero.
●​ When TP starts decreasing, MP becomes negative.

Relationship between AP and MP


●​ As long as MP is more than AP, AP rises.
●​ When MP is equal to AP, AP is at its maximum.
●​ When MP is less than AP, AP falls.
●​ Both AP and MP fall but MP becomes negative whereas AP remains
positive.

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