MCom I Semester Managerial Economics Product Production Function Study Material Notes

MCom I Semester Managerial Economics Product Production Function Study Material Notes: Meaning and Form of Product Mutual Relationship Between Total Product Average Product and Marginal product Meaning nad Definition of Product Function Nature or Characteristics of Production Functions Assumptions of Production Function Criticisms or Production functions Kinds of Productions FuFuncitons BCob Douglas Production Functions

CTET Paper Level 2 Set VIII Model Paper in English

PRODUCT AND PRODUCTION FUNCTION

MEANING AND FORMS OF PRODUCT

Production makes the goods and services available that are required for consumption. Product or output means the volume of goods produced by a firm during a certain period. There are three concepts of product :(1) Total Product; (2) Average Product; and (3) Marginal Product.

(1) Total Product. Total product means total volume of goods produced by a given amount of factors of production during a certain period. As the amount of a factor increases, total product also increases as follows: (i) Rate of increase in total product varies at differrent levels of employment of the factors of production. (ii) There is a limit to which total product can increase in response to an increase in the factors of population. Beyond this limit, total product cannot increase, even by increasing the amount of factors, rather it may decrease. This concept may be illustrated with the help of a product schedule and curve as above..

In this figure, units of labour are shown on x-axis and total product on y-axis. As the units of labour are increased, total product is also increasing but The rate of increase is not always equal. At the initial stage, it is increasing, then it is constant and at last, it is declining.

(2) Average Product. Average product may be defined as per unit product of a variable factor. It can be calculated by dividing total product hy the number of units of a particular factor. Thus,

Total product Average Product =

Number of units of a factor

Tendency of average product is almost the same as of total product. As the amount of a factor is increased, average product also increases. After a point, it starts to decline.

However, it can never be zero or negative. This concept can be explained with the help of a production schedule and curve as follows:

In this figure, units of labour are shown on x-axis and Average Product on y-axis. At the initial stage of product, average product shows an increasing trend but at the later stage, it starts to decline.

(3) Marginal Product. Marginal product may be defined as an addition to total product resulting from an increase of one unit of a variable factor. It can also be defined as the rate at which total product increases. Thus, N

Increase in Total Product Marginal Product =

Increase in Units in Variable Factor)

Marginal product of a factor also varies at different levels of employment of factor. It rises at initial stage but ultimately it starts to decline. At a point, it becomes zero. Total product is maximum when marginal product is zero. This concept also can be explained with the help of a product schedule and curve as follows:

In above figure, units of labour are shown on X-axis and Marginal Product on y-axis. Marginal product is increasing at the initial stage of production. It is contact for a while and then declining. It has become zero at a point. This is the point of maximum total product. If the units of labour are further increased, marginal product will be negative.

MUTUAL RELATIONSHIP BETWEEN TOTAL PRODUCT,

AVERAGE PRODUCT AND MARGINAL PRODUCT

1 As the quantity of variable factor of production is increased, total product also increases.

2. Total product is maximum when marginal product is zero.

3. Total product and average product can never be zero. Hence, they can never be negative.

4. If the quantity of variable factors of production is increased after marginal product has become zero, total product will start to decline. At this stage, marginal product will be negative.

5. At the initial stage of production, total product increases at an increasing rate. At the ultimate stage, total product increases at a diminishing rate.

]MEANING OF FUNCTION

The word ‘function’ is derived from Mathematics. It establishes relationship between two variables. It explains the extent to which one variable depends upon another. Example: We know that demand of a commodity depends upon its price. It can be expressed as, “Demand is the function of price”. Mathematically,

D=F(P) Where as,

D = Demand of commodity,

F = Function of (Depends upon)

P = Price of commodity.

MEANING AND DEFINITION OF PRODUCTION FUNCTION

Production is the outcome of combined efforts of various factors of production and quantity of production depends directly upon the quantity of these factors. Commodity to be produced is called ‘output’ and factors of production used in the production of that commodity are called ‘inputs’. Thus, inputs produce output. Production function means functional relationship between physical inputs (factors of production) and physical output of a firm. It indicates maximum rate of output that can be obtained from different combinations of productive factors during a certain period of time and for a given state of technical knowledge. It has been defined as under:

Above equation shows that the quantity of production depends upon the quantities of variable factors of production. Thus, production function states the maximum quantity of production that can be obtained from any chosen combination of factors of production. Two things are important to be noted is this respect :

(1) Production function should be considered with reference to a particular period of time.

(ii) Production function is determined by the state of given technology. If there is any change, production function will also change.

NATURE OR CHARACTERISTICS OF PRODUCTION FUNCTION

1 Production function Establishes relationship between Physical Questions of Output and Input

2. Determination of production function is an engineering problem not an economic problem.

3. Though production function is independent of the price of product and on the factors of production, yet these prices affect the decisions of a firm to product a particular commodity in a particular quantity.

4. Production function should be considered with a given state of technology

5. Inputs can easily be substituted for one another within a function.

6. Change in inputs is essential to change a production function.

7. Divisibility or indivisibility of the factors should be taken into account in determining the production function of a firm.

ASSUMPTIONS OF PRODUCTION FUNCTION

1 It is related with a specific period of time.

2. State of technological know-how is assumed to remain constant.

3. Factors of production are divisible into small units.

4. It is assumed that the firm has already achieved the optimum combination of factors of production.

5. It is assumed that the prices of factors of production remain constant.

CRITICISMS OF PRODUCTION FUNCTION

1 Production function does not apply on a change in the level of technical knowledge.

2. Production function does not apply on a change in time.

3. The assumption of the optimum use of productive resources is not real.

4. The assumption of constant prices of factors of production is not real.

KINDS OF PRODUCTION FUNCTION

(1) One Variable and Two Variables Production Function. If only one factor of production is employed as input, it will be called one variable nroduction function. If two factors are employed, it will be called two variable production function. In such case, enterpreneur may use different combinations of two factors.

(2) Production Function for an Individual Firm and Production ion for the Economy as a whole. Production function for an individual formed into output. An individual firm may explains how inputs are transformed into output. An individual Single product or a combination of products. Production function for the economy as a whole explains output in terms of value

(3) Short-run and Long-run Production Function. Short-run auction function explains the relationship between inputs and output when “y the variable factors of production can be changed. Long-run production unction explains the relationship between inputs and output when all the factors of production can be changed.

(4) Homogeneous and Non-homogeneous Production Function. When all the factors of production can be changed, production function is called homogeneous production function. When only the variable factors of production can be changed, production function is called non-homogeneous production function. Thus, returns to scale explain homogeneous production function and the laws of variable proportion explain non-homogeneous production function.

COBB-DOUGLAS PRODUCTION FUNCTION

Cobb-Douglas production function, one of the most important functions, was introduced by Prof. C. W. Cobb and P. H. Douglas. Popularly it is known as Cobb-Douglas production function. It cosiders only two inputs of production : labour and capital. Mathematically, it can be presented as follows:

Q = AL“ Kl-a

Explanation of Function :

Q = Quantity of output

L = Quantity of Labour

K = Quantity of Capital

A = Positive constants with a <1 (2)

(2) This function assumes that there are only two inputs of production : Labour and Capital and all the units of an input are identical and homogenous.

(3) 75% of increase in production is due to labour and 25% is due to capital.

(4) Nature of this function is linear and homogenous i.e., if the quantity of labour and capital is doubled, quantity of production will also be double.

(5) This function assumes perfect competition in the market.

(6) Returns to scale applies to manufacturing industry.

Criticisms of Function :

(1) This function consider only two inputs of production viz. labour and capital and ignores all other inputs of production.

(2) This function is based on the assumption of constant returns to scale which is not a real assumption.

(3) This function is based on the assumption of perfect competition in the market which is also not a real assumption.

(4) This function assumes that all the units of an input of production are identical and homogeneous which is also not very much practical .