Economics Production function dr.K.Baranidharan - Sri Sairam Institute of Technology, Chennai

Dr.K.BaranidharanPresent by…

Engineering Economics &

Financial Accountingment

Ee&fa2April 18, 2023

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UNIT - III

PRODUCTION

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PRODUCTION

• “Production is the process of transformation of inputs into goods and services of utility to consumers and/or producers”.

FACTORS OF PRODUCTION• LAND: gift of nature and not the result of human

effort. The fixed in supply therefore the return from land is called rent.

• LABOUR: the physical or mental effort of human being that undertakes the production process is labour. It is known primary factors of production.

• The labour includes unskilled, semi skilled and highly skilled labour.

• A untrained person working as helper to a mason, or an electrician, an engineer, a manger, a scientist, the CEO of a company all are examples of labour.

• The return for labour is termed as wages and salary5

• CAPITAL: capital is that wealth which is used for further production. It is not a gift of nature. But is produced by human beings.

• Capital is the output of one production process that generally goes an input in another.

• Modern economic theory categorists capital into physical capital and human capital:

• PHYSICAL CAPITAL: comprises of tangible resources like equipments, buildings, machines and intermediarly good

• HUMAN CAPITAL: constitutes of the knowledge, skills and investments made by people through education, experience and training that help to produce more or better goods or service. Return for capital is interest

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• ENTERPRISE: the ability and action to collect, coordinate, and utilize all the factors of production for the purpose of economic gains is known as enterprise.

• The special feature of this factor of production is that the returns herein are expected, but not certain.

• All other factors contribute to production process for definite returns, without any risk and uncertainty.

• ORGANISATION: the factors of production has been added in the body of economic theory to acknowledge the role of a special kind of function, which is a combination of highly skilled labour and specialized human capital.

• It is organizational efficiency that differentiates one company from another in terms of success

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PRODUCTION FUNCTION

• The technical relationship reveals the maximum amount of output capable of being produced by each and every set of inputs. It is defined for a given state of technical. SAMUELSON

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• The function which defines the maximum amount of output that can be produced with a given set of inputs.

•MICHAEL R BAYE

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• A) production functions is more concerned with the physical aspects of production.

• It is the concerns of the engineer rather than of the manager to know how much can be produced with a given set of inputs

• B)production function is defined at a given stage of technical knowledge

• It means that if there is any technological breakthrough, there could be further jump in the volume of production for a given set of inputs.

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• C)production function is an engineering relation that ex[presses the maximum amount of output that can be produced with a given set of inputs

• D)at any given time, the output from a given set of input is always fixed

• E) production function will enable us to understand how best we can make use of technology to its greatest potential

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• “”.• “Production function is a

technological relationship between physical inputs and physical outputs over a given period of time”

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INPUT-OUTPUT RELATIONSHIP OR PFInputs for any product or service are land, labour, capital,

organisation and technology.In other words, production here is a function of these five

variable inputsMathamatically, this is expressed as

Q = f (L1,L2, C, O, T )

Q is the quantity of prodctionF explain the function that is the type of relation between

input and outputsL1 refers to land, L2 refers to labour, C refers to capital O

refers to Organisation, T referes to technology, respectively

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PRODUCTION FUNCTION WITH ONE VARIABLE INPUT AND LAW OF RETURNS

• The law of returns states that when at least one factor of production or factor input is fixed and all other factor are varied, the total output in the initial stage will increase at an increasing rate, and after reaching a certain level of out, the total output will increase a declining rate.

• The Law is of universal nature and it proved to be true in both agriculture and industry.

• The Law of Returns is also called the Law of Variable proportion or the Law of Diminishing Returns.

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Output with Fixed Capital and Variable Labour Inputs

Units of labour Total Product Marginal Product

Average Product

stages

0 0 0 0

1 10 10 10 Stages.1

2 22 12 11

3 33 11 11

4 40 7 10 Stages.11

5 45 5 9

6 48 3 8

7 48 0 6.85

8 45 -3 5.62 Stages.111

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Total Product, Average Product and Marginal Product Curves

• Units of labor (variable inputs)

TP

AP

MP

Stage 1 Stage 11 Stage 111

CB

A

Output

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• In the short run, it is assumed that capital is a fixed factor input and labour is variable input.

• It is also assumed that technology is nor going to change.• Under such circumstances. The firm starts production with a

fixed amount of capital and uses more and more units of labour.

• Output will increase at an increasing rate up to point A when more and more units of labour are increased.

• After the point A the output increases at a declining rate till it reaches maximum at point C.

• After point C, the total output decline and the marginal products of labour in negative.

• This indicates that the additional units of labour are next making any positive contribution to the total output. Even if labour is a available free of cost. It is not worth using it

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PRODUCTION FUNCTION WITH TWO VARIABLE INPUTS

• Production function in a two-input factor setting may look too easy to be useful.

• It has been a valuable tool for managers to decide what combination of inputs yields a given output at the lowest cost.

• In case of multiple input factors, quantitative techniques such as optimization techniques and linear programming provide the solutions.

• Computers have further simplified the complexity of production function in a multiple input factor setting

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• Let us consider a production process that requires two inputs, Capital (C) and Labour (L) to produce a given output (Q).

• There could be more than two inputs in a real life, situation, but we restrict the number of inputs to two for the purpose of analysis.

• In other words, production function based on two inputs can be expressed as

• Q = f (C, L) where• C referes to Capital• L referes to Labour

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• Normally, both capital and labour are required to produce a product.

• To some extent, these two input can even be substituted.

• Hence, a producer may choose any combination of labour and capital which gives him the required number of units of output.

• For any given level of output, a producer may hire both capital and labour but he is free to choose any one combination of labour and capital out of several such combinations.

Dr.K.BaranidharanTHANK YOU

THANK YOU!!

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