Prof. M.P. Rege

ANSARI BUSHRA 03

VISHAL JADHAV 13

SALMAN KHATRI 23

MOMIN SAUD AHMED 33MOHAMMED ISMAIL SAYYED 43SOHINI SURANI

53

Production implies provision of goods and services, often described as ‘Commodities’.

A production function refers to the functional relationship, under the given technology, between physical rates of input & output of a firm, per unit of time.

Q = f(L, M, N,K,T)

TYPES OF PRODUCTION FUNCTION

SHORT RUN PRODUCTION 1 variable constant Works in tandem with Laws

of variable Proportions

3 Stages – Increasing returns Diminishing returns Negative returns

LONG RUN PRODUCTION Both Variables Works in tandem with

Laws of returns to scale

3 Stages –

Increasing returns to scale

Constant returns to scale Diminishing returns to

scale

In production, returns to scale refers to changes in output subsequent to a proportional change in all inputs (where all inputs increase by a constant factor).

It is a long run production function

Q = f(a1,b1,c1,.....,n,T)

Technique of production is unchanged

All units of factors are homogenous

Returns are measured in physical terms

Increasing returns to scale

Constant returns to scale

Decreasing returns to scale

Increasing returns to scale occurs if a proportional increase in all inputs under the control of a firm results in a greater than proportional increase in production.

SCALE OF

PRODUCTION

MA

RG

INA

L R

ETU

RN

Technical and managerial indivisibilities

Higher degree of specialization

Dimensional relations

Constant returns to scale occurs if a proportional increase in all inputs under the control of a firm results in an equal proportional increase in production.

SCALE OF PRODUCTION

MA

RG

INA

L R

ETU

RN

Indivisibility of fixed factors.

When the factors of production are perfectly divisible, the production function is homogenous of degree 1 showing constant returns to scale.

Decreasing returns to scale occurs if a proportional increase in all inputs under the control of a firm results in a less than proportional increase in production.

SCALE OF PRODUCTION

MA

RG

INA

L R

ETU

RN

Size of the firms expands, managerial efficiency decreases.

Limited resources.

An economy of scale exists when larger output is associated with lower per unit

cost.

ECONOMIES OF SCALE

Labour economiesTechnical EconomiesMarketing EconomiesManagerial Economies

A diseconomy of scale exists when larger output leads to higher per unit

cost.

DISECONOMIES OF SCALE

Managerial DiseconomiesMarketing DiseconomiesTechnical Diseconomies

ECONOMIES OF SCALE, DISECONOMIES OF SCALE &

RETURNS TO SCALE Returns to scale are

the flip slide of economies of scale and diseconomies of scale. However, whereas economies and diseconomies of scale focus on cost, returns to scale focus on production.

Economies of scale indicate that long-run average cost decreases, which corresponds to increasing returns to scale in terms of production.

Diseconomies of scale indicate that long-run average cost increases, which corresponds to decreasing returns to scale in terms of output.

Constant returns to scale for production terms results when long-run average cost neither increases nor decreases.

ECONOMIES OF SCALE, DISECONOMIES OF SCALE &

RETURNS TO SCALE

LIMITATION OF RETURNS TO SCALE