Final PPt on theory of production iii

APPLIED THEORY OF PRODUCTION

Presented By:- PHM 0912-Dinesh Kumar Gupta PHM 0913-Girish T Patil PHM 0914-Indresh Deshma

Production• Production means transforming inputs(labor, capital, raw

material, time etc ) into an output. This concept is limited to manufacturing.

• In Economic sense Production means the process by which resources ( men, material, time etc) are transformed into different and more useful commodity or service.

• For E.g. Ranbaxy, Lupin, Biocon, Dr Reddys, Emcure, Pfizer etc.

Sector Production

ProductionTransformation of I/Ps or resources into O/P of goods and services

Medicines, Vaccines etc.

Production Function• It is a mathematical presentation of input and output

relationship.

• Technological relationship showing different combinations of inputs that can produce maximum outputs within a given time period with a given technology.

• In general it specifies the inputs on which depends the production of a commodity or service,

• In its specific form, it states the quantitative relationships between inputs and outputs.

production function

Production Function

The production function can be mathematically written as:

Q=f(Lb, L, K, T, t….)

L=land. f- represents the production technology

Lb=labor. Q- level of output K=capital. T=Technology. t=time.

Factors affecting productivity

1.Technology2.Inputs • Labor • Capital• Machinery• Land• Raw material• Power3.Time period

Factors of Production• Inputs – the factors of production are classified as:

▫Land – all natural resources of the earth, Price paid to acquire land = Rent.

▫Labour – all physical and mental human effort involved in production Price paid to labour = Wages/Salary

▫Capital – buildings, machinery and equipment not used for its own sake but for the contribution it makes to production Price paid for capital = Interest

▫Entrepreneur – has the risk taking ability, decision maker, Innovative Price paid to the entrepreneur= Profit or Loss

Factors of Production

• Input classification:

Fixed input: quantity remains same irrespective of the level of outputExample: Land, Factory building, Plant, Machinery, top Management

Variable input: the supply of these has to be changed to obtain different units of output.Example: Labour, raw material

Time Dimensions Of Production

Production has time dimensions. Production can be planned for short run or for long run, this time dimension depends upon the nature of demand for its product, availability of inputs, state of technology.

▫Short-run production function assumes that at least one of the inputs is fixed.

▫Long-run production function assumes that all inputs are variable.

Concepts of product

Product or Output –“Volume of goods produced by a firm during specified period of time”

Total Product- “ total volume of goods produced over a period of time”

Marginal Product- “the rate at which total product increases”

Average Product- “it is obtained by dividing total product by the total units of variable input factors”

Variable Input (X)

Total Product

(Q or TP)

Average Product

(AP)0 0 ---1 8 82 18 93 29 9.674 39 9.755 47 9.46 52 8.677 56 88 52 6.5

Variable Input (X)

Total Product (Q or TP)

Marginal Product (MP)

0 01 82 183 294 395 476 527 568 52

8

1011

10

8

4-4

0

5

Calculations

Short Run Laws of production by Alfred Marshall

• The laws of production state the relationship between output and input.

• In short run, input-output relations are studied with one variable input (labour), others(especially capital) held constant.

• The laws of production under these conditions are called the “Laws of variable proportions” or the “Laws of return to a variable input”

Law of increasing returns

• This law states that with an increase in the quantity of variable factor, average and marginal products show a tendency to rise (i.e. total product increases with an increasing rate)

No of men

Total Product

Average Product

Marginal Product

0 0 0 01 20 20 202 50 25 303 90 30 404 160 40 70

5 250 50 90

Law of constant returns• This law explains that if the

quantity of a variable factor is changed then the average and marginal products will not change i.e. total output will increase only at a constant rate

• This law is the intermediate stage between the initial stage of the increasing return and the ultimate stage of the diminishing returns.

No of men

Total Product

Average Product

Marginal Product

0 0 0 --

1 100 100 100

2 200 100 100

3 300 100 100

4 400 100 100

5 500 100 100

Law of diminishing returns• It is the ultimate stage of

production.• Initially an increase in the

quantity of variable factors results in higher efficiency and more production.

• But beyond the optimum stage increase in the variable factors only disrupts the existing organization and leads to inefficiency.

• At this stage the average and marginal products continuously fall.

No of men

Total Product

Average Product

Marginal Product

0 0 0 01 10 10 102 18 9 83 25 8.3 74 30 7.5 5

5 32 5.4 2

-3

-2

-1

0

1

2

3

4

5

0 1 2 3 4 5 6 7

0

2

4

6

8

10

12

14

16

1 2 3 4 5 6 76

’

TotalProduct

Marginal& AverageProduct

Labor

Labor

THE LAW OF DIMINISHING RETURNS &

STAGES OF PRODUCTION

Stage I Stage II Stage III

TP

MP

AP

Three Stages of production

▫Stage I (increasing returns) From zero units of the variable input to where AP is

maximized

▫Stage II (diminishing returns) From the maximum AP to where MP=0

▫Stage III (negative returns) From where MP=0 on where MP < 0(negative)

▫ If MP > AP then AP is rising.

▫ If MP < AP then AP is falling.

▫MP=AP when AP is maximum

RELATIONSHIP Between AP & MP

• If MP is positive then TP is increasing.

• If MP is negative then TP is decreasing.

• TP reaches a maximum when MP=0 (Maximization Condition!)

RELATIONSHIP Between TP & MP

Max

Conclusion

• Production should be stopped at the point where Marginal Product is equal to Marginal Cost

• Here there is maximum utilization of resources

• MP=MC= max utilization of resources.

• Ideally it should be MP ≥ MC

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