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WITH ONE VARIABLE INPUT
 The production function
 How output varies with the application
of productive inputs in both the shortrun and the long-run.
 Total, Marginal and Average Products
 The Significance of the AverageMarginal Distinction
 The amount of output produced depends upon the
inputs used in the production process
 The production function specifies the maximum
amount of output which can be produced with
specific level of inputs, given the level of existing
technological know-how
 In general form, a production function may be
expressed as:
Q = F(K,L)
where Q is output quantity
K is capital
L is labour
 Inputs – the factors of production classified as:
– Land – all natural resources of the earth
Price paid to acquire land = Rent
– Labour – all physical and mental human effort
involved in production
Price paid to labour = Wages
– Capital – buildings, machinery and equipment
not used for its own sake but for the contribution
it makes to production
Price paid for capital = Interest
Production is the creation of output that
creates utility.
Production requires inputs : land, labour,
capital, technology, energy, etc.
The production function involves the
transformation of inputs into output.
Variable Input : one whose quantity
may be varied in the short run and the
long run.
Fixed Input : one whose quantity may
not be varied in the short run, but may
be varied in the long run.
Short Run : production function with
one variable input, during which at
least one of the inputs used in the
production process cannot be altered.
Long Run : production function with all
variable inputs, during which all the
inputs can be altered.
In the short run at least one factor is fixed
in supply but all other factors are capable
of being changed
Reflects ways in which firms respond to
changes in output (demand)
Can increase or decrease output using
more or less of some factors but some
likely to be easier to change than others
Increase in total capacity only possible
in the long run
Fig illustrates several properties
commonly found in short run
production functions :
No variable input  no
output.
Output initially increases
at an increasing rate as the
variable input increases,
thereafter it increases at a
decreasing rate. Eventually
output may decline as
variable inputs are
increased.
These properties are not
universal.
 The long run is defined as the period of time taken to
vary all factors of production
– By doing this, the firm is able to increase its total
capacity
– Associated with a change in the scale of
production - to study the returns to scale
– The period of time varies according to the firm
and the industry
– The returns to scale are due to internal and
external economies and diseconomies of scale of
production
Total Product : total output produced
for a given amount of variable input.
Marginal Product : the change in total
product as a result of a unit change in
the variable input (ceteris paribus).
MPL = ∆Q/∆L
The marginal product concept is vital in
running an enterprise, as it plays a
pivotal role in the calculation of the firms
output level.
Average Product : APL = Q/L
Average product is known as labour
productivity when the variable input is
labour.
– Fig. illustrates
 In stage 1 TP increases upto point A at increasing
rate, after that it increases at diminishing rates. This
stage is stage of increasing returns because average
product of the variable factor increases.
 In stage 2 TP continues to increase at diminishing
rates upto point C. This stage is stage of
diminishing returns as both the average and
marginal product of the variable factor diminishes.
 In stage 3 TP declines , average product also
declines and marginal product becomes negative.
When the marginal product curve lies
above the average product curve, the
average product curve must be rising
When the marginal product curve lies
below the average product curve, the
average product curve must be falling.
 The two curves intersect at the
maximum value of the average product
curve.
The general rule for allocating inputs
efficiently is to allocate the next unit of input
to the production activity where its marginal
product is highest.
A rational producer will seek to produce in
stage 2
Stage 1 and 3 represent non-economic
region in production function
DO NOT allocate resources to the activity
with the highest average product!!!
Prepared by
Anuradha Mittal
Associate Professor
Department of Economics
PG Government College,
Sector 11, Chandigarh