PRODUCTION ANALYSIS

MBA, SEM 1, SEC-B

The Organization of Production

Inputs
Labor, Capital, Land

Fixed Inputs Variable Inputs Short Run

At least one input is fixed

Long Run
All inputs are variable

The Production Function

Production refers to the transformation of inputs or resources into outputs of goods and services. Q= f(L,K) Where, Q= Total Production L= Labour K= Capital

The production function with one variable input

The production function with two variable input

Production Isoquants
An Isoquants shows the various combinations for two inputs (say, labor and capital) that the firm can use to produce a specific level of output. A higher isoquant refers to a larger output, while a lower isoquant refers to a smaller output.

Economic Region of Production

While the isoquants in Figure 6-6 (repeated in Figure 6-7) have positively sloped portions, these portions are irrelevant. That is, the firm would not operate on the positively sloped portion of an isoquants because it could produce the same level of output with less capital and less labor.

The production function with two variable input

The production function with two variable input

Isoquants: From the table, it can be seen that 12Q can be produced with 1L and 5K, 1L and 4K, 3L and 1K or 6L and 1K.

The production function with two variable input

The Relevant Portion of Isoquants. The economic region is given by the negatively sloped segment of isoquants between ridge lines OVI and OZI.

Cobb-Douglas : Empirical Production Function

The production function most commonly used in empirical estimation is the power function of the form that is

Q = ALaKb
where: Q = total production L = labour input K = capital input A = constant a and b are the parameters of labor and capital respectively. These values are constants determined by available technology.

Returns to Scale
Returns to scale refers to the degree by which output changes as result of a given change in the quantity of all inputs used in production.

A Practical illustration of long run returns to scale

Year Q (million tons) K (in Cr.) L % increase in INPUT % Increase in OUTPUT
2000-01 2001-02 2002-03 2003-04 7.126 7.315 8.029 8.581 18265 17045 16542 15271 150832 147601 137496 131910 -1.11 -4.90 -5.87 2.65 9.67 6.88 Increasing Increasing Increasing

Returns to scale

2004-05
2005-06 2006-07 2007-08 2008-09 2009-10

8.901
9.351 9.849 10.288 9.846 9.736

20064
21782 25476 28450 34552 43752

126857
138211 132973 128804 121295 116950

-17.61
0.20 -10.38 -2.41 -13.64 -15.10

3.73
5.05 5.33 4.46 -4.30 -1.12

Increasing
Increasing Increasing Increasing Increasing Increasing

Properties of Cobb-Douglas production function

The marginal product of capital and the marginal product of labour depend on both the quantity of capital and the quantity of labour used in production. The exponents of K and L (a and b) represent, respectively, the output elasticity of labour and capital (Ek and El), and the sum of the exponents (that is a + b) measures the returns to scale. Cobb-Douglas production function can be estimate by regression analysis by transforming it into which is linear in the logarithms. ln Q = ln A + a ln K + b ln L Cobb-Douglas production function can easily be extended to deal with more than two inputs (say, capital, labour,).

Estimated ln Q ln K and ln L of SAIL co.

Year Q (million K (in Cr.)
tons)
2000-01 2001-02 2002-03 2003-04 7.126 7.315 8.029 8.581 18265 17045 16542 15271 150832 147601 137496 131910 1.96375007 1.98992703 2.08305999 2.14955046 9.81274194 9.74361218 9.71365788 9.63371088 11.9239219 11.9022680 11.8313501 11.7898752

ln (Q)

ln (K)

ln (L)

2004-05
2005-06 2006-07 2007-08 2008-09 2009-10

8.901
9.351 9.849 10.288 9.846 9.736

20064
21782 25476 28450 34552 43752

126857
138211 132973 128804 121295 116950

2.18616363
2.23548329 2.28736993 2.33097817 2.28706528

9.90668244
9.98883922 10.14549211 10.25590344 10.45022071

11.7508157
11.8365368 11.7979014 11.7660471 11.7059809

2.27583036

10.68629261

11.6695018

Assumptions for Empirical Production function

1. If either labor or capital vanishes, then so will production. 2. The marginal productivity of labor is proportional to the amount of production per unit of labor. 3. The marginal productivity of capital is proportional to the amount of production per unit of Capital.

Company Profile
Steel Authority of India Limited (SAIL) have been working since January 19, 1954. It is one of the leading steel-making company in India. SAIL's wide range of long and flat steel products are much in demand in the domestic as well as the international market. This vital responsibility is carried out by SAIL's own Central Marketing Organisation (CMO) that transacts business through its network of 37 Branch Sales Offices spread across the four regions, 25 Departmental Warehouses, 42 Consignment Agents and 27 Customer Contact Offices.

Production Details
Capital Employed no. of Employees year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 (K) (rs. in cr) 18265 17045 16542 15271 20064 21782 25476 28450 34552 (L) 150832 147601 137496 131910 126857 138211 132973 128804 121295 Production (in million tons) (Q) 7.126 7.315 8.029 8.581 8.901 9.351 9.849 10.288 9.846

2009-10

43752

116950

9.736

Comparison Between Ideal and actual Production curve

Comparison Between Ideal and actual Production curve

output vs. Labour
12 11 10 9 8

output vs. Labour

7 6 5

Descriptive Data
Count Sum Maximum Minimum Mean Median Standard 10 89.022 10.288 7.126 8.9022 9.126 1.112755019 10 241199 43752 15271 24119.9 20923 9170.08784 10 1332929 150832 116950 133292.9 132441.5 10671.748

deviation

Regression Analysis
Regression Statistics

Multiple R

0.825430802

df
R Square Adjusted R Square 0.681336009

SS

MS

Significanc eF

0.590289155

Regressio n

0.103079

0.05154

0.0182669 7.483356 26

Standard Error

0.082989426

Observations

10

Residual Total

7 9

0.048211 0.15129

0.006887

Regression Analysis
Coefficients
Standard Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept

12.4062558

7.341064 1.689981 0.134878

-4.95260142

29.76511

-4.9526

29.76511

X Variable 1

0.105405824

0.124444 0.847014 0.424995

-0.18885754

0.399669

-0.18886

0.399669

X Variable 2

-0.95656085

0.537485

-1.7797

0.118347

-2.22751038

0.314389

-2.22751

0.314389

Summary
To perform regression analysis the collected data has been transformed in to the logarithm form, than the regression analysis is performed which gives the following production function of the SAIL ln Q = 12.4063 + 0.1054 lnK + -0.9566 lnL

From the above result of the production function it is to conclude that the production of the SAIL is capital Intensive rather than the labour intensive The production function of the SAIL through the regression analysis which is helpful to understand that the production is capital intensive and it can also important to estimate the volume of production for the coming years.