Production, Factors of Production and Scales

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Introduction to Production, Factors of Production and Scales:

Introduction to Production, Factors of Production and Scales Nitish Kumar Arya M.A. Economics Banaras Hindu University Varanasi – 221005

What is Production?:

What is Production? Production to an economist, is the creation of utilities to satisfy wants; whether that means the creation of a good itself in agriculture or industry; its transport from the point of production to the point of consumption (geographical distribution); its transport through time from the moment of production to the moment of consumption, in stock-piles, cold stores, warehouses or granaries (distribution through time); or the provision of personal services directly enjoyed by individuals or groups such as health education, health and entertainment

Types of Production:

Types of Production Primary production - Man’s inheritance of natural wealth such as mining, agriculture, fishery, forestry etc Secondary production - derived production from natural primary products - industry for example Tertiary production Commercial services - wholesale, banks, insurance, export house Personal services - professor, doctor, advocates

Production Theory:

Production Theory In production resources used for the production of a product or service are known as factors of production (also known as inputs) land labour capital organization Production Function P = f(A,B,C,D)

Law of Variable Proportions:

Law of Variable Proportions “as the quantity of a variable input is increased by equal doses, keeping the quantities of other inputs constant, the total product will increase, but after a point, at a diminishing rate” In other words, when more and more units of the variable factor is used (holding the quantities of other factors constant), a point is reached beyond which the marginal product, then the average product and finally the total product will diminish This law is also known as law of diminishing returns

Law of Diminishing Returns:

Law of Diminishing Returns

PowerPoint Presentation:

Law of Diminishing Returns

Importance of Law:

Importance of Law It applies to not only agriculture but also industry - universal applicability By substituting one factor in place of other, efficiency (or higher levels of production and productivity) can be achieved Remember the importance of capital and labour as factors of production in developing nations

Law of Returns to Scale:

Law of Returns to Scale What happens when all the inputs are increased in the same proportion? The scale of production will increase - but effect on production shows three stages Increasing Returns to Scale Constant Returns to Scale Diminishing Returns to Scale

Law of Returns to Scale:

Law of Returns to Scale

Production Function Isoquant and Isocost Approach:

Production Function Isoquant and Isocost Approach An isoquant is a curve on which the various combinations of labor and capital show the same output. This curve is also known as production indifference curve

Production Function Isocost Approach:

Production Function Isocost Approach Isocost curves are also known as outlay lines, price lines, input-price lines, factor-cost lines, constant-outlay lines etc. Each isocost line represents the different combinations of two inputs that a firm can buy for a given sum of money at the given price of each point.

Isocost - Diagram:

Isocost - Diagram The point where the isocost line tangent to an isoquant curve represent the least-cost combination of the two factors capital labour

Equilibrium of a Firm -What is equilibrium?:

Equilibrium of a Firm -What is equilibrium? Firms will produce in such a way that the profit is maximized Firms will not change the production function at equilibrium output Profit = TR-TC TR = P x Q (price x quantity) AR = TR/Q = (P x Q)/Q = P therefore, AR curve showing different values of AR at various levels of output is same as the demand curve faced by an individual firm (latter shows quantities)

Shape of Demand Curve:

Shape of Demand Curve Relationship between AR and Q is shown by the shape of the demand or AR curve AR upward sloping or rising left to right AR downward sloping AR horizontal to X axis First possibility is unlikely - a firm may not be able to sell larger and larger output by charging higher and higher price The second and third depends on the type of market

Marginal Revenue:

Marginal Revenue MR= TR (N+1) - TR (N) or change in total revenue upon change in quantity Therefore, MR is equal to the slope of TR curve Relation between AR and MR MR = change TR/change Q MR = change (PxQ)/change Q = change (ARxQ)change Q =AR(change Q/change Q) + Q (change AR/change Q) MR=AR+Q(change AR/change Q) therefore (MR-AR) = Qx(slope of AR curve) MR = AR when AR is horizontal and MR is <AR when AR is downward sloping

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