MICROECONOMICS
CHAPTER-5
PRODUCTION FUNCTION
Production refers to transformation of inputs into output.
PRODUCTION FUNCTION
It is an expression of the technological relation between physical inputs and output
of a good.
It tells us the maximum output that can be produced with given input and minimum
input needed to produce given output.
These are of two types:
Short run- output is changed by only changing one input, keeping other inputs constant
Long run- output is changed by changing all the inputs in same ratio
SHORT RUN
Output can be changed by bringing change in variable factors
It has variable and fixed factor
Demand is more active in price determination as supply can’t be changed
immediately with an increase in demand
LONG RUN
Output can be changed by changing all the factors as required
All the factors are variable factors
Demand and supply play equal role in price determination as both can be increased
FACTORS
There are two factors:
Variable
These can be changed in short run
It varies with output
Eg: raw materials, labour, etc.
, Fixed
These can’t be changed in short run
It does not vary with output
Eg: machinery, land, etc.
PRODUCT
Product or output refers to the volume of goods produced by a firm or an industry
during a specified period of time
It is of three types:
Total product
It is the total quantity of output produced by a firm
TP = AP X Q
TP = ∑MP
Average product
It is the output per unit of variable input
AP = TP/Q
Marginal product
It refers to the addition to TP when an additional unit of variable input is employed
It gives us the rate at which TP is increasing
MP = TP(n) – TP(n-1)
MP = change in TP/ change in units of variable factor
LAW OF VARIABLE PROPORTIONS
It states that when we increase quantity of only one input keeping all the other
factors same, then TP will increase initially at an increasing rate then at diminishing
rate and finally at negative rate
Assumptions
It is applied to short run, as factors are classified into variable and fixed factors
It applies to the field of production only
It is assumed that technology is constant
It is assumed that all the variable factors are equally efficient
CHAPTER-5
PRODUCTION FUNCTION
Production refers to transformation of inputs into output.
PRODUCTION FUNCTION
It is an expression of the technological relation between physical inputs and output
of a good.
It tells us the maximum output that can be produced with given input and minimum
input needed to produce given output.
These are of two types:
Short run- output is changed by only changing one input, keeping other inputs constant
Long run- output is changed by changing all the inputs in same ratio
SHORT RUN
Output can be changed by bringing change in variable factors
It has variable and fixed factor
Demand is more active in price determination as supply can’t be changed
immediately with an increase in demand
LONG RUN
Output can be changed by changing all the factors as required
All the factors are variable factors
Demand and supply play equal role in price determination as both can be increased
FACTORS
There are two factors:
Variable
These can be changed in short run
It varies with output
Eg: raw materials, labour, etc.
, Fixed
These can’t be changed in short run
It does not vary with output
Eg: machinery, land, etc.
PRODUCT
Product or output refers to the volume of goods produced by a firm or an industry
during a specified period of time
It is of three types:
Total product
It is the total quantity of output produced by a firm
TP = AP X Q
TP = ∑MP
Average product
It is the output per unit of variable input
AP = TP/Q
Marginal product
It refers to the addition to TP when an additional unit of variable input is employed
It gives us the rate at which TP is increasing
MP = TP(n) – TP(n-1)
MP = change in TP/ change in units of variable factor
LAW OF VARIABLE PROPORTIONS
It states that when we increase quantity of only one input keeping all the other
factors same, then TP will increase initially at an increasing rate then at diminishing
rate and finally at negative rate
Assumptions
It is applied to short run, as factors are classified into variable and fixed factors
It applies to the field of production only
It is assumed that technology is constant
It is assumed that all the variable factors are equally efficient
