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Published by: aasthagoyal on Sep 25, 2010
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PRODUCTION FUNCTION

K ) The production function is always in relation to a period of time. Then . 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.WHAT IS PRODUCTION FUNCTION?  The production function shows a technical or engineering relationship between the physical inputs and physical outputs of a firm .  Production function is purely a technical relationship . say labour (L) and capital (K) .  Eg.suppose a firm is manufacturing a steel chairs with the help of Egtwo inputs . It has no reference to money price. we can write the production function as X = f ( L.  . for a given state of technology.

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

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

b) L.shaped isoquants isoquants for perfect complementary factors are L SHAPED . Exceptions to the normal shape of the isoquant a) Linear isoquant isoquants for perfect subsitute factors are straight lines sloping downward to the right.ie they take the shapes of right angles c) Kinked or linear programming isoquants - .PROPERTIES OF ISOQUANT      Isoquants have a negative slope.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.

that aproducer is willing to sacrifice for an additional unit of labour so as to maintain the same level of output. .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 .

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

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

Because the output per unit of the variable input is improving throughout stage 1. the latter reaching a maximum at point B (since the average physical product is at its maximum at that point). output increases at a decreasing rate. In Stage 2. In this stage.Law of variable proportions In Stage 1 (from the origin to point B) the variable input is being used with increasing output per unit. because output is rising while fixed input usage is constant. and the average and marginal physical product are declining. the employment of additional variable inputs increases the output per unit of fixed input but decreases the output per unit of the variable input. 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 output per unit of both the fixed and the variable input declines throughout this stage. the highest possible output is being obtained from the fixed input. .STAGES OF PRODUCTION FUNCTION  In 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. At the boundary between stage 2 and stage 3.

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

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 .

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

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