Production

 Meaning:

 Production refers to the transformation of inputs into outputs (or products). It involves transformation of inputs such as capital, equipment, labour, and land into output - goods and services.

In economic sense production process may take a variety of forms other than manufacturing transporting and all types of services.

 5M’s of Production:

 ❖Man ❖Machine ❖Material ❖Money ❖Method

 

Period of Production

Current Period/ Very Short Period: In this type of production, activities are being performed for 1 hr, 2 Hr or for a day. Here all factors are inelastic in nature.

 

Short Period:Short run refers to a period of time which is too short to allow an enterprise to change its, plant capacity, yet along enough to allow a change. The short run is a period of time when there is at least one fixed factor input. This is the only period where both Fixed and Variable factor distinction can be seen.

Long Period:Long run refers to a period of time which is long enough to permit a firm or enterprise to alter all its resources or inputs. In the long run, all of the factors of production can change giving a business the opportunity to increase the scale of its operations.

 Factors of Production

❖Land: In economics, land as a factor of production does not refer only to the surface of land but to all gifts of nature, such as rivers, oceans, climate, mountains, fisheries, mines, forests, etc. In the words of Dr Marshall. By land is meant materials and forces which nature gives freely for man’s aid, in land, water, in air, light and heat.

❖Labour: Labour refers to all mental and physical work undertaken for some monetary reward. It includes the services of a factory worker, a doctor, a teacher, a lawyer, an engineer, an officer, etc.  ❖Capital: Capital means all man-made resources. It comprises all wealth other than land which is used for further production of wealth. It includes tools, implements, machinery, seeds, raw materials and means of transport etc.

❖Entrepreneur : Factors of production viz. land, labour and capital are scattered at different places. All these factors have to be assembled together. This work is done by enterprise through entrepreneur. This is an 'Organization Function‘. Fixed Vs. Variable Factor

• Fixed inputs remain fixed (constant) up to certain level of output. Their supply is inelastic in the short run. A Fixed input is defined as one whose quantity cannot be changed instantaneously in response to changes in market conditions requiring an immediate change in output. ExampleBuildings, major capital equipment and managerial personnel.

• Variable inputs change with the change in output. Their supply is elastic in the short run. Variable input is one whose quantity can be changed readily when market conditions suggest that an immediate change in output is beneficial to the producer. Example- Raw materials and labour services

 Production Function

Production Function is a mathematical expression which defines the various combination between the input that help in producing optimum output.

 Q = f (L, N,K,T, t)

Where,

Q= Production function

 L= Land, K= Capital,

 N= Labour,

 T=Technology and

 t= Time

 

Production Function The production function is based on the following assumptions: ❖Technology is invariant. ❖Firm’s utilise their input at maximum level of efficiency. ❖We assume that all units of L and K are homogeneous or identical

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Law of Variable Proportion Concept: The law of variable proportion is one of the fundamental laws of economics. The law of variable proportion is the study of short run production function with some factors fixed and some factors variable. It is also known as Law of Returns.

 

 In the words of Prof. Marshall “An increase in the quantity of a variable factor added to fixed factors, at the end results in a less than proportionate increase in the amount of product, given technical conditions.”

 

 Law of Variable Proportion

Assumptions of the Theory: 1) The state of technology is assumed be given and unchanged.

2) The law specially operates in the short run because some factors are fixed and the proportion between factors is disturbed.

3) The law will hold good for short and given period.

 4) Factors are indivisible in nature. Law of Variable Proportion Assumptions of the Theory:

5) Variable factor units are homogeneous or identical in amount and quality.

6) The law is based on the possibility of varying the proportions in which the various factors can be combined to produce a product.

 7) Input prices remain unchanged.

8) Output is measured in physical units.

 

Law of Variable Proportion Explanation of Law: Units of Labour Total Product (TP) Marginal.

 

Law of Variable Proportion

Causes of Operation of Law of Variable Proportion/ Why does this law operate?

A)     Reasons for Increasing Returns to a Factor (Phase 1)

❖ Better Utilization of the Fixed Factor ❖ Increased Efficiency of Variable Factor ❖ Indivisibility of Fixed Factor

B) Reasons for Diminishing Returns to a Factor (Phase 2) ❖ Optimum Combination of Factors ❖ Imperfect Substitutes

C) Reasons for Negative Returns to a Factor (Phase 3) ❖ Limitation of Fixed Factor ❖ Poor Coordination between Variable and Fixed Factor ❖ Decrease in Efficiency of Variable Factor

Law of Variable Proportion

Importance of Law:

• It is helpful in understanding clearly the process of production. It explains the input output relations.

 • It help the producer to work most ideal combination of input factors at reasonable prices.

• It is useful for short run production planning at micro level.

• The law tells us that the tendency of diminishing returns is found in all sectors of the economy which may be agriculture or industry.

 • The law tells us that any increase in the units of variable factor will lead to increase in the total product at a diminishing rate.

ISOQUANT CURVE • An isoquant (isoproduct) is a curve on which the various combinations of labour and capital show the same output.

 

 PROPERTIES ISOQUANT CURVE

• Isoquants are negatively inclined: Isoquant must slope downward to the right.

• An Isoquant lying above and to the right of another represents a higher output level. No isoquant can touch either axis. .

 PROPERTIES ISOQUANT CURVE

•In between two isoquants there can be a number of isoquants showing various levels of output which the combinations of the two factors can yield.

•No two isoquants can intersect each other PROPERTIES ISOQUANT CURVE

•Each isoquant is convex to the origin (Marginal Rate of Technical Substitution is applies •No isoquant can touch either axis. Isocost Curves

 • Each isocost curve represents the different combinations of two inputs that a firm can buy for a given sum of money at the given price of each input.

• These curves are also known as outlay lines, price lines, input-price lines, factor-cost lines, constant-outlay lines.

 

 Choice of Optimal Factor Combination/ Least Cost Combination of Factors The least cost combination of factors refers to a firm producing the largest volume of output from a given cost and producing a given level of output with the minimum cost when the factors are combined in an optimum manner.