Production Function,
SARBJEET KAUR
Lecturer in Economics
GCCBA-42 ,Chandigarh
Email:[email protected]
• Production Function: Production of goods requires resources or inputs.
These inputs are called factors of production named as land, labor, capital
and organization. A rational producer is always interested that he should
get the maximum output from the set of resources or inputs available to
him. He would like to combine these inputs in a technical efficient manner
so that he obtains maximum desired output of goods. The relationship
between the inputs and the resulting output is described as production
function. A production function shows the relationship between the
amounts of factors used and the amount of output generated per period
of time. Production functionestablishes a physical relationship between
output and inputs. It describes what is technical feasible when the firm
uses each combination of input. The firm can obtain a given level of
output by using more labor and less capital or more capital and less labor.
Production function describes the maximum output feasible for a given
set of inputs in technical efficient manner.
• Short run and Long Run: The analysis of production function is
generally carried with reference to time period which is called short
period and long period. The short run is a period of time in which
only one input (say labor) is allowed to vary while other inputs land
and capital are held fixed. In the long run al the factors of
production are variable. The long run is the lengthy period of time
during with all inputs can be varied. There are no fixed output in the
long run. All factors of production are variable inputs.
• In the short run, therefore, production can be increased with one
variable factor and other factors remaining constant. In the short
run, the law of variable proportion governs the production behavior
of a firm. The law of variable proportion shows the direction and
rate of change in the output of firm when the amount of only one
factor of production is varied while other factor of production are
held constant. The law of variable proportion passes mainly through
two phases, (i) Increasing Returns and (ii) Diminishing Returns.
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Law of Variable Proportions (Short Run Analysis of Production):
There were three laws of returns mentioned in the history of economic thought up
till Alfred Marshall's time. These laws were the laws of increasing returns,
diminishing returns and constant returns. Dr. Marshall was of the view that the law
of diminishing returns applies to agriculture and the law of increasing returns to
industry. Much time was wasted in discussion of this issue. However, it was later
on recognized that there are not three laws of production. It is only one law of
production which has three phases, increasing, diminishing and negative
production. This general law of production was named as the Law of Variable
Proportions or the Law of Non-Proportional Returns.
The Law of Variable Proportions which is the new name of the famous law of
Diminishing Returns has been defined by Stigler in the following words. "As equal
increments of one input are added, the inputs of other productive services being
held constant, beyond a certain point, the resulting increments of produce will
decrease i.e., the marginal product will diminish According to Samuelson, "An
increase in some inputs relative to other fixed inputs will in a given state of
technology cause output to increase, but after a point, the extra output resulting
from the same addition of extra inputs will become less".
• Causes of Initial Increasing Returns:
• The phase of increasing returns starts when the quantity of a fixed factor
is abundant relative to the quantity of the variable factor. As more and
more units of the variable factor are added to the constant quantity of the
fixed factor, it is more intensively and effectively used. This causes the
production to increase at a rapid rate. Another reason of increasing
returns is that the fixed factor initially taken is indivisible. As more units of
the variable factor are employed to work on it, output increases greatly
due to fuller and effective utilization of the variable factor.
• (ii) Stage of Diminishing Returns. This is the most important stage in the
production function. In stage 2, the total production continues to increase
at a diminishing rate until it reaches its maximum point (H) where the 2nd
stage ends. In this stage both the
• marginal product (MP) and average product of the variable factor are
diminishing but are positive.
• Causes of Diminishing Returns:
• The 2nd phase of the law occurs when the fixed factor becomes
inadequate relative to the quantity of the variable factor. As more
and more units of a variable factor are employed, the marginal and
average product decline. Another reason of diminishing returns in
the production function is that the fixed indivisible factor is being
worked too hard. It is being used in non-optima! proportion with
the variable factor, Mrs. J. Robinson still goes deeper and says that
the diminishing returns occur because the factors of production are
imperfect substitutes of one another.
• (iii) Stage of Negative Returns. In the 3rd stage, the total production
declines. The TP, curve slopes downward (From point H onward).
The MP curve falls to zero at point L2 and then is negative. It goes
below the X axis with the increase in the use of
• variable factor (labor).
• Causes of Negative Returns:
• The 3rd phases of the law starts when the number of a
variable, factor becomes, too excessive relative, to the
fixed factors, A producer cannot operate in this stage
because total production declines with the
employment of additional labor.A rational producer will
always seek to produce in stage 2 where MP and AP of
the variable factor are diminishing. At which particular
point, the producer will decide to produce depends
upon the price of the factor he has to pay. The
producer will employ the variable factor (say labor) up
to the point where the marginal product of the labor
equals the given wage rate in the labor market.
Returns to Scale
The laws of returns to scale explain the behavior
of output in response to a proportional and
simultaneous change in inputs. Increasing
inputs proportionately and simultaneously is,
in fact, an expansion of the scale of
production.
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When a firm increases both the inputs
proportionately, there are three possibilities
1. Total output may increase more than
proportionately
2. Total output may increase proportionately
3. Total output may increase less than
proportionately
Accordingly, there are three kinds of return to
scale
1. Increasing returns to scale
2. Constant returns To Scale
3. Decreasing returns to scale
It refers to changes in output resulting from a proportional
change in all inputs (where all inputs increase by a constant
factor). If output increases by that same proportional change
then there are constant returns to scale (CRS). If output
increases by less than that proportional change, there are
decreasing returns to scale (DRS).