PRODUCTION CONCEPT

PRODUCTION DIRECTLY OR INDIRECTLY SATISFIES THE NEEDS AND WANTS OF PEOPLE.

IT IS CONCERNED WITH THE SUPPLY SIDE OF THE MARKET.

IT IS THE TRANSFORMATION OF INPUTS INTO OUTPUT OF A COMMODITY OR SEVERAL COMMODITIES IN A SPECIFIC PERIOD OF TIME AT THE GIVEN STATE OF TECHNOLOGY.

IT IMPLIES CREATIONS OR ADDITION OF FORM, PLACE & TIME UTILITIES BY THE PRODUCTION AND STORAGE, DISTRIBUTION OF DIFFERENT USUABLE COMMODITIES AND SERVICES.

FACTORS OF PRODUCTION :

(i) LAND

(ii) LABOUR

(iii) CAPITAL

(iv) ENTERPRENEURS

PRODUCTION FUNCTION

Q = f (K, L, l, O)

Q = OUTPUT, K = CAPITAL

L = LABOUR, l = LAND

O = ORGANISATION

PRODUCTION FUNCTION

DIFFERENT COMBIMATIN OF INPUTS & OUTPUTS.

IT SHOWS FOR A GIVEN TECHNOLOGICAL KNOWLEDGE & MANAGERIAL ABILITY.

MAXIMUM AMOUNT OF GOODS THAT CAN BE OBTAINED FROM DIFFERENT CONDITION OF PRODUCTIVE FACTORS.

MINIMUM QUANTITIES OF VARIOUS INPUTS REQUIRED TO YIELD A GIVEN QUANTITY OF OUTPUT.

THE CHOICE OF PARTICULAR PRODUCTION METHOD DEPENDS ON

* RATIONALITY

* TECHNICALLY COEFFICIENT.

Q = F (K,L)

OUTPUT

LABOUR & CAPITAL

PRODUCTION FUNCTION

TYPES OF PRODUCTION FUNCTION :

(I) FIXED PROPORTION & VARIABLE PROPORTION.

(II) LINEAR & NON LINEAR PRODUCTIN FUNCTION.

Q = αK + βL α = CONTRIBUTION OF CAPITAL

TO OUTPUT.

β = CONTRIBUTION OF LABOUR

TO OUTPUT.

LINEAR HOMOGENOUS PRODUCTION FUNCTION

Q = f (K, L)

nQ = f (nK, nL)

(III) COBB - DOUGLAS PRODUCTION FUNCTION.

Q = AL K (O < α) (β < 1)

Q = OUTPUT L >O, K >O

A = EFFICIENCY PARAMETER.

THE MORE EFFICIENT FIRM WILL HAVE A

LARGER VALUE OF A.

α, β ARE PARTIAL ELASTICIES OF OUTPUT WITH

RESPECT TO LABOUR AND CAPITAL.

ISO QUANTS / ISO PRODUCT CURVE / EQUAL PRODUCT CURVE

IT REPRESENTS ALL POSSIBLE INPUT

COMBINATION OF TWO FACTORS WHICH ARE CAPABLE OF PRODUCING SAME LEVEL OF OUTPUT.

PRODUCER WOULD BE INDIFFERENT BETWEEN SUCH COMBINATIONS, SO IT IS OFTEN REFERRED TO AS PRODUCER’S INDIFFERENCE CURVE OR PRODUCTION INDIFFERENCE CURVE.

AN ISO QUANTS REPRESENTS DIFFERENT TECHNIQUES OF PRODUCTION.

CAPITAL INTENSIVE. LABOUR INTENSIVE.

EACH HIGHER ISO QUANTS REPRESENTS HIGHER LEVEL OF OUTPUT.

IQ IQ1 IQ1

CAPITAL

300

200

100

LABOUR

MARGINAL RATE OF TECHNICAL SUBSTITUTION (MRTS)

MRTS INDICATES THE RATE AT WHICH FACTORS

CAN BE SUBSTITUTED AT THE MARGIN IN SUCH

A MANNER THAT THE TOTAL OUTPUT REMAINS

SAME.

MARGINAL RATE OF TECHNICAL SUBSTITUTION

OF LABOUR FOR CAPITAL IS THE QUANTITY OF

CAPITAL CAN BE GIVEN UP IN EXCHANGE FOR

AN ADDITIONAL UNIT OF LABOUR.

MRTS = ΔK = SLOPE ΔL

TOTAL OUTPUT

LOSS OF OUTPUT = GAIN IN OUTPUT.

i.e. REDUCTION IN K* = INCREMENT IN L* MARGINAL PHYSICAL MARGINAL PHYSICALPRODUCT OF K PRODUCT OF L

ΔK X MPK = ΔL X MPL

ΔK = MPLΔL MPK

MPL

MRTS L,K = MPK

MRTS OF FACTOR L FOR FACTOR K IS THE RATIO OF

MARGINAL PRODUCTIVES OF TWO FACTORS.

SLOPE OF ISO QUANT

Q = f (K, L) = k. Q = OUTPUT

k = CONSTANT

SLOPE OF A CURVE = SLOPE OF TANGENT

AT ANY POINT AT THAT POINT

TAKING TOTAL DERIVATIVE.

Q Q

dQ = K . dK + L . dL

= MPK. dK + MPL. dL

SINCE THE TOTAL OUTPUT REMAINS THE SAME ALONG AN ISO QUANT

dQ = MPK. dK + MPL. Dl = O

dK MPL

dL MPK

MPL

MRTS L, K = MPK

SLOPE AND HENCE THE MRTS IS THE MEASURE OF

THE RELATIVE MARGINAL PRODUCT OF THE

FACTORS.

PROTERTIES OF ISO QUANTS

* ISO QUANTS SLOPE DOWNWARD FROM

LEFT TO RIGHT. –When quantity of one factor Increases, the quantity of other factor reduces, so that total product remains const.

* ISO QUANTS NEVER CUTS, TOUCH OR

INTERSECT EACH OTHER.

* ISO QUANTS ARE CONVEX TO THE ORIGIN-because of diminishing rate of technical substitution.