Production and cost

Meaning of Production
Production is the organized activity of transforming resources into finished products in the form of goods and services;
the objective of production is to satisfy the demand for such transformed resources.

All jobs which do aim at satisfying wants are part of production. Those who provide services Such as hair-dressers,
solicitors, bus drivers, postmen, and clerks are as much a part of the process of satisfying wants as are farmers, miners,
factory workers and bakers.

INPUT OUTPUT
FACTOR OF PRODUCTION:-
The first three factors—land; labour and capital do not work independently or in isolation. There is need to combine
these factors and co-ordinate their activities. This two-fold function is performed by the organizer or the entrepreneur.
But this is not the only function of the entrepreneur. In fact, production can never take place without some risk being
involved. the decision to produce something has to be taken in anticipation of demand and there must be some element
of uncertainty about that demand materialising.
Thus, risk taking or enterprise can be considered as a fourth factor of production, and those responsible for taking these
risks are usually referred to as entrepreneurs
 Production Function
the production function refers to the functional relationship between the quantity of a good produced (production)
and the factors of production (input).
Thus, the production function shows how much production we can expect if we have too much labor and so much capital
as well as labor. In other words, we can say that the production function is an indicator of the physical relationship
between the two inputs and outputs of a firm.
Mathematically, such a basic relationship between input and output can be expressed as: –
Q = f(L, K)
Where ‘Q’ = quantity of output
‘L’ = labor
Q (DEPENDENT) = f (L , K)(Independent)
‘K’ = capital
Production Function

SHORT RUN Law LONG RUN

of variable Law of return to
proportion scale
Law of return
Calculation of Total Product, Average Product, Marginal
Product
Total Product is defined as the sum total volume of Production or total
number of Units produced with the given fixed and variable inputs.
Average Product Average product is defined as the ratio between total
product and number of units of variable factor. AP = TP / Units of
Variable Factor.
Marginal Product is defined as the Increment in total output due to
the use of an extra unit of labour. MP = Change in Total Product /
Change in Variable Factor OR MP = ∆ TP /∆ L
Total Production
It refers to the total amount of output that a firm produces within a given period, utilising given inputs.
Total Product Formula is

TP= AP*L
Where AP= product/ labour unit; L= Labour

Average Product
It is output per unit of inputs of variable factors.
Average Product (AP)= Total Product (TP)/ Labour (L).

Marginal Product
It denotes the addition of variable factor to total product.
Thus, Marginal product= Changed output/ changed input.

marginal product leads to an increase of total product with the help of additional worker or input
Increasing negative
Three Stages of Law of Variable Proportions
• Law of Variable Proportions consists of three phases:
• Increasing returns
In many cases, the increase in variable factor is initially followed by increasing marginal
returns. total output increases more than proportionally to the variable factor. This phase does no
last longer. Soon the Law of diminishing starts.
• Decreasing returns
If increase in variable factor is continued, the marginal product starts falling . The law of
decreasing sets in.
• Negative returns
When a business experiences decreasing returns and the quantity of variable factor is further
increased, the marginal returns becomes negative
 Law of return to scale
“The term returns to scale refers to the changes in output as all factors change by the same proportion.”
Koutsoyiannis

PRODUCTION FUNCTION Q + - = f(K,L) + -

Law of variable proportion Law of return to scale

Law of return
LONG RUN
SHORT RUN
Increasing Returns to Scale:
Increasing returns to scale or diminishing cost refers to a situation when all factors of production are increased,
output increases at a higher rate. It means if all inputs are doubled, output will also increase at the faster rate
than double. Hence, it is said to be increasing returns to scale.

OX axis represents increase in labour

and capital while OY axis shows
increase in output. When labour and
1L +1k= 100 unit
capital increases from Q to Q1, output
2L+ 2K=250 unit
also increases from P to P1 which is
higher than the factors of production
i.e. labour and capital.
Diminishing Returns to Scale:
Diminishing returns or increasing costs refer to that production situation, where if all the factors of production are
increased in a given proportion, output increases in a smaller proportion. It means, if inputs are doubled, output will
be less than doubled. If 20 percent increase in labour and capital is followed by 10 percent increase in output, then
it is an instance of diminishing returns to scale.

On OX axis, labour and capital are given while on OY axis,

output. When factors of production increase from Q to
Q1 (more quantity) but as a result increase in output, i.e. P
to P1 is less. We see that increase in factors of production
is more and increase in production is comparatively less,
thus diminishing returns to scale apply.

1L +1k= 100 unit

2L+ 2K=150 unit
Constant return to scale

Constant returns to scale or constant cost refers to the production situation in which output increases
exactly in the same proportion in which factors of production are increased. In simple terms, if factors of
production are doubled output will also be doubled.

we see that increase in factors of production i.e. labour and capital are equal to the proportion of output
increase. Therefore, the result is constant returns to scale.

1L+1K= 100 unit

2L+2K= 200 unit
 Isoquant Curve
Isoquant Curve:

An isoquant curve may be defined as a curve showing the possible combinations of two variable factors that can be
used to produce the same total product.

A technical relation that shows how inputs are converted into output is depicted by an isoquant curve. It shows the
optimum combinations of factor inputs with the help of prices of factor inputs and their quantities that are used to
produce the same output.

The term ISO implies equal and quant means quantity or output.

Isoquant curves are also called as equal product curves or production indifference curves.
By combining Isoquants and Iso-cost line , a producer can find out the combination of factor of production which is
optimum that is the combination of factor of production which would minimize his cost of production.
Properties of Isoquant Curve

Some of the properties of isoquant curve are as follows:

1. Isoquant curves slope downwards

2. Isoquant curves are convex to origin
3. Isoquant curves cannot intersect each other
4. Higher the isoquant the higher the output