A

PROJECT
ON
THE THEORY OF
PRODUCTION

ECONOMICS- (I)

SUBMITTED TO: SUBMITTED BY:

DR. TOPAN PATRA GANESH OJHA

FACULTY OF ECONOMICS BA. LLB
CUSB 2ND SEMESTER
ROLL- CUSB1612125017

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 CHAPTERISATION

S. No. CHAPTERS Pg. No.

1. INTRODUCTION 2
1.1. OBJECTIVE OF THE STUDY 2
1.2. METHODOLOGY 2
1.3. FACTORS AFFECTING THE STUDY 3
2. PRODUCTION FUNCTION 4
2.1. PRODUCTION FUNCTION WITH ONE VARIABLE FACTOR 4
2.1.1. DIFFERENT PHYSICAL PRODUCTS 4
2.1.2. LAW OF VARIABLE PROPORTIONS 5
2.1.3. THREE STAGES OF PRODUCTION 6
2.2. PRODUCTION FUNCTION WITH TWO VARIABLE FACTORS 7
2.2.1. ISOQUANTS 7
2.2.2. MARGINAL RATE OF TECHNICAL SUBSTITUTION 8
2.2.3. RETURN TO SCALE 10
3. SUMMARY AND CONCLUSION 13
4. BIBLIOGRAPHY 14

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 INTRODUCTION

The production function is the name given to the relationship between the rates of inputs of
productive services and the rate of output of product. It is the economists summary of
technological knowledge. Production function considered with reference to a particular period of
time, expresses a flow of inputs resulting in a flow of output in a specific period of time.

The word production in economics is not merely confined to effecting physical transformation in
the matter, it is creation or addition of value. Production function can be studied in two ways
depending upon the nature of factors involved as:

1. Short-Run Production Function

2. Long-Run Production Function

OBJECTIVE OF THE STUDY

The objective of the study of production function is concerned to minimize the cost of production
for producing a given level of output or to maximize output for a given level of cost.

METHODOLOGY

Production function can be represented in various form. It can be represented by tables, graphs,
mathematical equations, showing the maximum quantity of output that a firm can produce per
period of time with various combinations of factors (i.e., inputs). Production function can be
represented by input-output tables as well as isoquants when two factors needed to be shown.

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 FACTORS AFFECTING THE STUDY

Production function can differ with:

1. Period of time- production function expresses a flow of inputs resulting in a flow of

output in a specific period of time.
2. Technology- when there is advancement in technology, the production function changes
with the result that the new production can yield grater flow of output from the given
inputs, or smaller quantities of inputs can be used for producing a given quantity of
output.

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 PRODUCTION FUNCTION WITH ONE
VARIABLE FACTOR

The production function when the quantities of some inputs are kept constant and the quantity of
one input (or quantities of few inputs) are varied. The concept of returns to a variable factor is
relevant for the short run as capital, machines, land remain fixed and factors such as labor, raw
materials are increased to expand output. The short-run two factor production function can be
written as:

Q= f(L, K)

DIFFERENT PHYSICAL PRODUCTS:

1. Total Product (TP): The total product of a variable factor is the amount of total output
produced by a given quantity of the variable factor, keeping the quantity of other factors
such as capital, fixed.
2. Average Product (AP): Average product of a variable factor (labor) is the total output
(Q) divided by the amount of labor employed with a given quantity of capital (fixed factor)
used to produce a commodity.
Average physical product of labor (AP) = Q(total output)/L(quantity of labor)

3. Marginal Product (MP): It means the contribution of extra unit of output from extra
unit of variable.
MP= dQ/dL

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LAW OF VARIABLE PROPORTIONS:

The law of variable proportions or law of diminishing proportion states, As equal increments
of one input are added; the inputs of other productive services being held constant, beyond a certain
point the resulting increments of product will decrease, i.e., the marginal products will diminish.

According to Samuelson,

--an increase in some inputs relative to other fixed inputs will, in a given state of technology,
causes output to increase; but after a point the extra output resulting from the same additions of
extra inputs will become less sand less.

Law of variable proportion examines the production function with one factor variable, keeping
the quantities of other factors fixed and refers to the input-output relation when output is increased
by varying the quantity of one input.

Assumptions of the Law:

1. Technology is constant.
2. Capital must be kept fixed.
3. Products must require the variable proportion of factors.

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THREE STAGES OF PRODUCTION

STAGE1:
In stage 1, fixed factor is more than variable factor relatively. Average product curve continue to
rise through the first stage. Therefore, it is called the stage of increasing return. Since average
physical product rises throughout the stage 1, no rational producer will stop the production at the
end of stage 1. Therefore, he will produce till stage 2.

STAGE2:
In stage 2, marginal physical product and average physical product keep on decreasing, therefore,
it is called the stage of diminishing returns. Fixed factor are scarce and variable factors are in

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abundant, thus variable factor could not be utilized. Stage 2 is very crucial and important because
the firm will seek to produce in its range.

STAGE3:
In stage 3, total product declines and therefore the total product curve slopes downward. In this
stage, variable factor is too much relative to the fixed factor. This state is called the stage of
negative returns since the marginal product of the variable factor is negative during this stage.

PRODUCTION FUNCTION WITH TWO

VARIABLE FACTOR

ISOQUANTS:

Isoquants refer to the combination of two inputs that will produce the same level of output. It is
known as equal product curve. These are downward sloping curves and factors of production are
imperfectly substitute to each other.

Isoquants have four properties:

1. Two isoquants dont intersect each other.

2. Downwards sloping curve
3. Convex to origin
4. Different isoquants give different output

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Marginal rate of technical substitution is the slope for the isoquant curve.

Slope of isoquant curve= dK/dL

MARGINAL RATE OF TECHNICAL SUBSTITUTION:

Marginal rate of technical substitution is the rate at which the producer will substitute labour for
capital to produce the same level of output.

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Marginal rate of technical substitution is the slope for the isoquant curve.

Slope of isoquant curve= dK/dL

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RETURN TO SCALE:

Return to scale refers how we expend or change the output by changing the amount of all the
inputs.
(i) CRS (Constant Return to Scale)
(ii) IRS ( Increasing Return to Scale)
(iii) DRS ( Decreasing Return to Scale)

1. CRS : It is a property of production function that holds when a proportional increase in all
inputs results in an increase in output by the same proportion. It is called linear
homogeneous production function. It is also called linear homogeneous production
function or homogeneous production function at the first degree.

For example: when we double all inputs, output is exactly doubled.

2Q F=(2k,2L)

2. IRS: It holds when a proportional increase in all inputs results in an increase in output by
more than the proportion. For example,

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 2Q F>(2k,2L)

3. DRS: It holds when a proportional increase in all inputs results in an increase in output
by less than the proportion. In DRS, the distance between two isoquants gets larger. The
production of output requires larger and larger amount of inputs.

For example: when we double all inputs, output is less than doubled.

2Q F<(2k,2L)

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 SUMMARY AND CONCLUSION

Some important problems encountered in the production function studies are very important.
Production function theoretically includes only technically efficient combinations of inputs and
output, the actual data used for measurement of production function may not actually represent
he efficient input combinations. This may cause some error in the estimation of production
function.
The physical relationship between inputs and output plays an important part in determining the
cost of production. It is the general description of this physical relation between inputs and
output which forms the subject matter of the theory of production.

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 BIBLIOGRAPHY

BOOKS REFERRED:-

1. DR. H.L.AHUJA, ADVANCED ECONOMY THEORY (MICROECONOMIC

ANALYSIS), S. CHAND, EDITION 2014.

ONLINE RESOURCES:-

1. WWW.ECONOMICS.ORG

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