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Published by: aasthagoyal on Sep 25, 2010
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 Eg. say labour (L) and capital (K) . we can write the production function as X = f ( L. It has no reference to money price.suppose a firm is manufacturing a steel chairs with the help of Egtwo inputs . for a given state of technology. K ) The production function is always in relation to a period of time.WHAT IS PRODUCTION FUNCTION?  The production function shows a technical or engineering relationship between the physical inputs and physical outputs of a firm . It does not take into account the price of either factors or the product  The production function includes all the technically efficient methods of production. Then .  Production function is purely a technical relationship .  .

will make a smaller and smaller addition to the total product . then . each successive unit of a variable factor . Thirkettle if increasing quantities of one factor of production are used in conjuction with fixed quantity of other factors .L.after a certain point .LAWS RELATED WITH PRODUCTION  Law of variable proportions According to G.

other are held constant or fixed.  Output is measured in physical units. keeping the quantities of other factors fixed. .Law of variable proportions The law which studies the relationship between one variable factor of production (say labour) and output .  Prices of factors of production do not change .  It is based on the following assumptions  only one input is variable.  The law relates to a given period of time  it assumes a short run  the state of technology is given and remains unchanged.  variable factor are homogeneous.

the isoquant slopes slopedownward to the right Isoquants are convex to the origin Two isoquants never intersect each other An isoquant lying above and to the right of another isoquant represents a higher level of output. Exceptions to the normal shape of the isoquant a) Linear isoquant isoquants for perfect subsitute factors are straight lines sloping downward to the right. b) L.shaped isoquants isoquants for perfect complementary factors are L SHAPED .ie they take the shapes of right angles c) Kinked or linear programming isoquants - .PROPERTIES OF ISOQUANT      Isoquants have a negative slope.

MARGINAL RATE OF SUBSITUTION  It indicates the rate at which one factor must be subsituted for another as onemoves down towards right along an isoquant The marginal rate of technical subsitution between labour and capital is defined as the number of units of capital . . that aproducer is willing to sacrifice for an additional unit of labour so as to maintain the same level of output.

there are three possibilties : I. but the factor proportion remains constant. The scale of production is said to be increased when all inputs are increased proportionately and simultaneously.LAWS OF RETURN TO SCALE    Studies the behaviour of output when the scale of operations is changed . When a firm increases all inputs proportionately and simultaneously . II. III. . The total output increases less than prportionately. The total output increases prportionately. The total output increases more than prportionately.

Decreasing return to scale III. Constant return to scale . Incresing return to scale II.LAWS OF RETURN TO SCALE  There are three stages to laws of return to scale ::I.

Law of variable proportions In Stage 1 (from the origin to point B) the variable input is being used with increasing output per unit. However the average product of fixed inputs (not shown) is still rising. a price-taking pricefirm will always operate beyond this stage. The optimum input/output combination for the pricepricetaking firm will be in stage 2. although a firm facing a downward-sloped demand curve might find it most downwardprofitable to operate in Stage 1 . the employment of additional variable inputs increases the output per unit of fixed input but decreases the output per unit of the variable input. In this stage. the latter reaching a maximum at point B (since the average physical product is at its maximum at that point). In Stage 2. output increases at a decreasing rate. because output is rising while fixed input usage is constant. and the average and marginal physical product are declining. Because the output per unit of the variable input is improving throughout stage 1.

STAGES OF PRODUCTION FUNCTION  In Stage 3. the highest possible output is being obtained from the fixed input. The output per unit of both the fixed and the variable input declines throughout this stage. . At the boundary between stage 2 and stage 3. too much variable input is being used relative to the available fixed inputs: variable inputs are over-utilized in the sense that overtheir presence on the margin obstructs the production process rather than enhancing it.

and if b + c < 1. it shows increasing returns to scale. L for labor.The Cobb-Douglas Production CobbFunction  The simplest production function is the CobbCobbDouglas model. diminishing returns to scale . and C for capital. the Cobb-Douglas model shows Cobbconstant returns to scale. and c (the latter two being the exponents) are estimated from empirical data. Q=aLbCc  If b + c = 1. It has the following form: where Q stands for output. The parameters a. If b + c > 1. b.

Types of Production Functions    Linear Production Function: A production function that assumes a perfect linear relationship between inputs & total output Leontief Production Function: A production function that assumes that inputs are used in fixed proportions CobbCobb-Douglas Production Function: A production function that assumes some degree of substitutability between inputs .




and c (the latter two being the exponents) are estimated from empirical data. the Cobb-Douglas model shows constant Cobbreturns to scale. and if b + c < 1.The Cobb-Douglas Production CobbFunction  The simplest production function is the Cobb-Douglas Cobbmodel. b. L for labor. diminishing returns to scale. The parameters a. and C for capital. It has the following form: Q=aLbCc where Q stands for output. . If b + c > 1.  If b + c = 1. it shows increasing returns to scale.

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