PRODUCTION ANALYSIS (SR).ppt

8/14/2019 PRODUCTION ANALYSIS (SR).ppt

1/13

GOOD AFTERNOON

PRODUCTION ANALYSIS

(SR)


2/13


3/13

Factors affecting Production

Several factors affect volume of production:

Natural Factors.

Political Factors.

Technical progress.

Development of credit and banking.

Means of transportation and communication.

Peoplesnature.

Factors of production are:

Any thing that contributes to output is called factor ofproduction.

Land, Labor, Capital, Organization.


4/13

Important Concepts of

Production Analysis

Total Product (TP): TP is the total quantity produced by all factor inputs

per unit of time.

Short run-variable input only,

long run-variable + fixed input. Average Product (AP):

AP is the total output divided by the number of units ofthe variable factor or the factor inputs.

Marginal Product (MP):

MP is the change in total output resulting from changein variable factor Inputs (OR) an addition made to totaloutput because of an change in factor input.


5/13

What is a Production Function ?

(PF) Production Function:

PF states the technical relationship between the physical inputs andthe physical output in the existing state of technology, per unit of time.

The output will change when the quantity of any input is changed.-technical relationship catalogue of output possibilities.

Factors affecting Production Function:

Quantity of resources used;

State of technical knowledge;

Possible processes-type of combinations;

Size of the firms;

Nature of market structure; Relative prices of the factors of production;

The manner in which the factors of production are combined.

If above factors change, production function will change too.


6/13

Nature of PF:

The PF is expressed in the form of a a mathematical equation inwhich output is the dependent variable and inputs are theindependent variable.

This relationship is stated as:

Q = f (L, N, K, ..n).

PF tells us how large an output can be produced with the help of agiven quantity of inputs.

PF differs from firm to firm. It depends on the technical knowledgeand the managerial ability available to firm.

PF of a firm changes when firm has access to higher level technicalknowledge and managerial ability.

The actual PF existing in a firm/industry statistical methods statistical PF Example: Cobb-Douglas PF.


7/13

Assumptions of PF:

PF is based on certain assumptions (conditions): Related to specified time period.

The state of technological change (knowledge) does not change duringthe time period.

Assumed that the firm will use the best and efficient technique availablein production.

Factors should be easily divisible into necessary requirement units.

There are three types of Production Function in economic theories:

PF with one variable input. This is called short run production function.

PF with all variable inputs. This is called long run production function.

Production Theory with two variable inputs (substitutes). Cobb- Douglasproduction function is such example of two variable inputs.


8/13

Short Run Production Function: This is also called as:

LAW OF VARIABLE PROPORTIONS (or)

LAW OF DIMINISHING MARGINAL RETURNS.

It is a PF with one variable input.

It shows the technical relationship of outputs with only one variableinput.

The Law of VARIABLE PROPORTION states that:

Asmore and more of the factor input (labor) is employed, all other

input quantities remaining constant, a point will be reached in the endwhere additional quantities of varying input will yield (produce)diminishing marginal contributions to total product.

Symbolically, {Q = f (L), K}


9/13

NO. of Labor Units

(L)

TP

(Kgs)

AP

(TP/L)

MP

( TPn-TPn-1) Stage

1 20 20 20 I

2 50 25 30 I

3 90 30 40 I

4 120 30 30 II

5 135 27 15 II

6 144 24 9 II

7 147 21 3 II

8 148 15.5 1 II

9 148 16.4 0 II

10 145 14.5 -3 III


10/13

Three stages of production:

The three concepts of production when observed pass throughthree different stages of production. (Diagram-P8 > labor on x axis andoutput on y axis)

First Stage:

TP increases at an increasing rate. AP increases. MP increasesfirst and then starts diminishing.

Second Stage:

TP is increasing at a diminishing rate. AP starts diminishing. MPdiminishes. The stage from where the MP of labor starts decliningshows the Law of diminishing returns or Law of Variable proportions.

Third Stage:

TP starts diminishing. AP also diminishes. MP becomes zero.Thereafter it is negative.


11/13

Reasons for different stages to occur:

In first stage there are fixed inputs-underutilized capacity- specialization and team work

cause AP to increase when additional input(labor) is used.

In Second stagespecialization-teamwork andproper utilization of the fixed inputs continues.

In Third stage - fixed inputs capacity getsexhausted and the additional labor (variableinput) causes the output to fall.


12/13

Optimum use of the variable Input:

A rational firm has to decide about how much of variable inputshould be used to maximize profits choose stage extrarevenue equals extra cost.

Stage one and Stage three should be avoided.

Stage one underutilizing fixed capacity- the MP of labor rises-profitable for employing additional labor.

Stage three over utilizing its fixed capacity- the MP isnegative- not profitable.

Stage two is OPTIMUM and should be selected proper

utilization of fixed inputs and variable input TP and AP arepositive Production only till MR=MC.

Stage Two is ideal for Short Run (maximizing the goal)


13/13

End

Law of variable proportions

PPTs by

Dr. Thirumagal Pillai

PRODUCTION ANALYSIS (SR).ppt

Documents