Production function ppt in economics

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Present by Mansi Tyagi Sadhana TyagiProduction function

What is Production??Its an activity that transforms input into output.

. Technology

. Inputs C- capital E- entrepreneurship L- land L- labour

Factors affecting Productivity

A production function can be an equation,table or graph presenting the maximum amount of a commodty that a firm can produce from a given set of inputs during a period of time. InputsProcessOutput Capital Labour Land

Product or service generated

Entrepreneurship

Production function

The production function can be mathematically written as: Q = f(L, K, T..n)

Where, Q = output L = labour K = capital T = level of technology n = other inputs employed in production

Production function

Uses of Production Function How to obtain Maximum output

Helps the producers to determine whether employing variable inputs /costs are profitable

Highly useful in longrun decisions

Least cost combination of inputs and to produce an output

Types of production function

#One variable factor

#Remaining ConstantShort run Production Function

Q = f(L,C)

Labourcapital

Two types:- Linear homogeneous Non-homogeneous#All inputs are variable Long run Production Function Q = f(L,C)

capital Labour200Q100Q

Paul H.Douglas and C.W Cobb of the U.S.A have studied the production of the american manufacturing industries and they formulated a statistical production function.

Empirical estimation is the power function of the form : Q = ALa Kb

where, Q = Output L = labour input K = capital input A, a and b are positive constants.

Q = AL3/4 K1/4.

Cobb-Douglas Production Function1/4+3/4 =1

PropertiesConstant return to scale: Q = ALa Kb Q = A(gL)a(gK)b = ga +b( ALa Kb)Q = ga +b Q 2. Average product of factor in C-D function:Avg. product of L = Q/L =

Avg. product of K = Q/K = ALa -1KbALa Kb-1

3. Marginal product of factor in C-D function:Marginal product of L holding K constant = dQ/dL= aQ/L Marginal product of K holding L constant = dQ/dL= bQ/K 4. The marginal rate of substituition between K&L:MRsLk = dQ/dL = a(Q/L)/b(Q/K) = a/b* K/L dQ/dK 5. C-D function & elasticity of substitution:(es = 1) d(K/L)* a/b a/b*d(K/L)= 1es =

LAWS OF PRODUCTION

WINTERTemplate

Law of Variable Proportion

If one factor is used more & more,keeping the other factors constant. The total output will increase at an increasing rate in the beginning and then at diminishing rate and eventually decreases absolutely.It states that:ASSUMPTIONS : Constant Technology Short run

Homogeneous Factors

Variable Input Ratio

Table illustrates the operation: Units of Labour

LTotal Product(Quintals) QAverage Product(Quintals)Marginal Product(Quintals)180808021708590327090100436892985430866264808050750472248504630949555-91048048-15

NegativeIRDR

Three Stages of Production:STAGE 1 : INCREASING RETURNS As the production of one factor in the combination of factor is increased upto a point, the MP of the factor will increase.

Reasons: Indivisibility of factorsQuantity of fixed factor Division of labour Economies STAGE 2 : DIMINISHING RETURNS

As the production of one factor in the combination of factor is increased after a point the average & MP of that factor will diminishing.Reasons: Scarcity of fixed factors Indivisibilty of fixed factor Lack of perfect substitution of factor of production

STAGE 3 : NEGATIVE RETURNS MP of variable factor is negative.

Reasons: Excessive variable factor Inefficiency of fixed factor

Law of Returns to Scale

It is a Long run analysis & all factors are variable. It seeks to analyse the effects of scale on the level of output.

Three kinds of returns to scale:

INCREASING RETURNS TO SCALECONSTANT RETURNS TO SCALEDECREASING RETURNS TO SCALE

ISOQUANTSIsoquant is a curve representing the various combinations of two inputs that produce the same amount of output.Also called as equal product curve.

Slope of an isoquant indicates the rate at which factors K and L can be substituted for each other while a constant level of production is maintained.

ASSUMPTIONS : There are two inputs: Labour L & Capital C to produce a commodity X. L,K & X are Perfectly divisible.Technology of product is given.

Isoquant curveKLL

Factor ProductionLabourCapitalA59B106C154D203E252

Example:

Isoquant curve

Types of Isoquant The shapes depends upon degree of substitutability of inputs:

Linear Isoquant: Input- Output Isoquant

ISOQUANTS are negatively inclined.ISOQUANTS are convex to the origin.Two ISOQUANTS cant intersect each other.ISOQUANTS doesnt touch either axis.

Properties of isoquants