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

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

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 . variable factor are homogeneous. Prices of factors of production do not change . 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.

PROPERTIES OF ISOQUANT Isoquants have a negative slope. b) L.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.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 - .

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. III. The total output increases less than prportionately. . but the factor proportion remains constant. The total output increases more than prportionately. When a firm increases all inputs proportionately and simultaneously . The total output increases prportionately. 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 . II.

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

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

The output per unit of both the fixed and the variable input declines throughout this stage. 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. .STAGES OF PRODUCTION FUNCTION In Stage 3. the highest possible output is being obtained from the fixed input. At the boundary between stage 2 and stage 3.

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

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

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