PRODUCT ION FUNCT ION

→ Production means any process

that converts a commodi ty or PRODUCT ION FUNCT ION
commodi ties in to a different Production function is an expression of
commodi ty. the technological relation be tween
→ Production refers to physical inpu ts and ou tpu t of a good.
transformation of inpu ts into O =f(i ,i ,i ………..i )
ou tpu t. Where O is ou tpu t of commodi ty X, F
For example: to manufacture shoes is functional relationship, I,, I ,…….I is
(ou tpu t), we need various inpu ts inpu ts is needed for ou tpu t
such as leather, nails, land, labour,
capi tal services of entrepreneur e tc

SHORT RUN
→ Short run refers to a period in which For example: if a producer wants to increase the
ou tpu t can be changed by changing only ou tpu t in the short run, then i t can be achieved by
variable factors. using more raw Material and increasing the number of
workers wi th the existing fixed factors.
→ Production can be raised by grieving → Hence, in the short run, some factors are fixed
variable factors bu t only to the ex tent of while some variable and fixed factors cannot be
capaci ty of fixed factors. changed during such a short span of time.

LONG RUN
→ Long run refers to a period in which ou tpu t can be changed by changing all the factors of
production.

→ The firm can change i ts factory size, swi tch to new techniques of production e tc.
 The distinction be tween short run and long run
The period is rather a functional concept, which depends on the production
condi tions. It varies from firm to firm and industry to industry.

For example, a period of 10 years may be shorter and period for steel industry,
while, a period of one year. Maybe a long run period for a wheat producer

Basis Short run. Long run.

A period in which ou tpu t can be A period in which ou tpu t can be
Meaning. changed by changing only the variable changed by changing all the factors of
factors. production.

Classification. Factors are classified as variable and All factors are variable in the long run.
fixed factors.

Price Demand is more active in price Both demand and supply play equal
de termination. de termination as supply cannot be role in price de termination, as both
increased immediately wi th increase in can be increased.
demand.
 VARIABLE FIXED
FACTORS FACTORS
→ Variable factors refer to those factors, → those factors, which cannot be
which can be changed in the short run. changed in the short run.

For e.g. raw material, casual labour, power, For e.g. Plant and machinery, building,
fuel, e tc. land,, e tc.

They vary directly wi th the level of ou tpu t. As Quanti ty remains same in the short
ou tpu t increases requirement for variable run, irrespective of level of ou tpu t.
factor also rises and vice – versa.

variable factors are not required in case of

zero ou tpu t.

Basis Variable factors Fixed factors

Meaning. Those factors, that can be changed in those factors, which cannot be
the short run. changed in the short run

Relation wi th They do not vary directly wi th the

ou tpu t. They vary directly wi th the ou tpu t ou tpu t.

Example Raw material, casual, labour, power, Building, plant and machinery,
fuel,, e tc. permanent staff,, e tc.
 Types of production function

SHORT RUN LONG RUN

→ si tuation when ou tpu t is increased by → si tuation, when ou tpu t is
changing only one ou tpu t while keeping increased by increasing all the inpu ts
other inpu ts unchanged. simul taneously and in the same
proportion.
→ As there is change in, only the variable
→ As all inpu ts or variable, the ratio
inpu t, the ratio be tween different
important to change a different level of be tween different important to remain
ou tpu t. the same at different levels of ou tpu t.

TOTAL PRODUCT AVERAGE PRODUCT

→ Total quanti ty of goods produced by a firm
during a given period of time wi th a given no. Of →.ou tpu t per uni t of variable inpu t..
ou tpu ts. → Also called:
→ Also called: Average physical product (APP)
total physical product (TPP) Average re turn
Total re turn
Total ou tpu t

MARGINAL PRODUCT ∑

→ addi tion to total production, when

ones more uni t of variable factor is
employed.
→ Also called:
Marginal physical product (MPP)
Marginal re turn
 Law of variable proportions
It states that as we increase the quanti ty of only one inpu t, keeping other inpu ts
fixed, the TP ini tially increases at an increasing rate, then at a decreasing rate
and finally at a negative rate

Also known as “law of re turns” or “law of re turns to factor” or

“re turns to variable factor”

Assumptions
It operates in the short run as factors are classified as variable and fixed factor

Law applies to all fixed factors including land

Different uni ts of variable factor can be combined wi th fixed factor

Applies to the field of production only

Effect of change in ou tpu t due to change in variable factor can be easily de termined

Factors of production become imperfect substi tu tes of each other beyond certain
limi t

The state of technology technology is assumed to be constant during the operation of

this law

All variable factors are equally efficient

 SCHEDULE AND CURVE
Fixed Variable TP MP Phase
factor factor
1 1 10 10 Phase 1: increasing
1 2 30 20 re turns to a factor
1 3 45 15 Phase II: diminishing
1 4 52 7 re turns to a factor
1 5 52 0
1 6 48 -4 Phase III: negative
re turns to a factor

Phase 1: increasing re turns to a factor.

(TP increases at an increasing rate.)

Every addi tional variable factor adds more

and more to the total ou tpu t
TP increases at an increasing rate and MP
of each variable factor also rises

Phase II: diminishing re turns to a factor

(TP increases at diminishing rate)

Every addi tional variable factor adds lesser

and lesser amount of ou tpu t
TP increases at a diminishing rate and MP
starts following wi th increase in variable
factor

Phase III: negative re turn to a factor

The employment of addi tional variable

factor causes TP to decline and MP
becomes negative
 base of operation
In phase I, employment of every In phase III, MP of each variable factor is
addi tional uni t of variable gives more negative. Therefore, a rational producer will
and more ou tpu t i.e. MP increases never produce in this phase due to technical
inefficiency.

Conclusion
A producer will aim to produce in waves. II, as TP is maximum and MP of
each variable factor is posi tive.

REASONS
increasing re turns to a factor (PH I)
1) Be t ter u tilisation of the fixed factor 2) increased efficiency of variable factor
=> supply of the fixed factor is too large, => When variable factor are increased
whereas variable factor are too few wi th the fixed factor, there is a great
cooperation and high degree of
=> the factor is not fully u tilised, bu t specialisation
when variable factors are increased and
combined wi th fixed factor, then the fixed => variable factor work in an efficient
factor is be t ter u tilised and ou tpu t manner
increases at an increasing rate
3) indivisibili ty of fixed factor
=> fixed factor that are combined wi th variable factor are indivisible

=> once an investment is made in an indivisible fixed factor, then addi tion of more and more uni ts,
improve the u tilisation of fixed factor
 Diminishing re turns to a factor (PH II)
1) imperfect substi tu tes 2) optimum combination of factors
=> diminishing re turn occur, because fixed => among the different combination
and variable factor become imperfect be tween variable and fixed factors, there
substi tu tes to each other is one optimum combination at which TP
is maximum
=> there is a limi t for which they can be
substi tu ted wi th one another => af ter making the optimum use, MP
begins to diminish

3) over u tilisation of fixed factor

=> as we keep on increasing the variable factor, eventually a posi tion comes when the
fixed factor has i ts limi ts and starts yielding diminishing re turns

Negative re turns to a factor (PH III)

1) limi tation of fixed factor 2) poor coordination be tween variable and fixed factor
=> The negative re turn applies => when variable factor becomes too excessive in relation
because some factors of to fixed factor, then the obstruct, each other, which leads
production are fixed which to poor coordination
cannot be increased wi th
increase in variable factor in => hence, total ou tpu t falls instead of rising and MP
short run. becomes negative

3) decrease in efficiency of variable factor

=> wi th continuous increase in variable factor, the advantages of specialisation and
division of labour start diminishing

=> i t resul ts in inefficiencies of variable factor, which is another reason for the
negative Re turn