1. MANAGERIAL ECONOMICS
PRODUCTION FUNCTION

2. PRODUCTION FUNCTION
• PRODUCTION
• Production is the process of converting an input into a more
valuable output.
• Inputs can normally be combined in more than one way to produce
output.
• Of all the possible combinations, there exists one which is the most
efficient.
• Production analysis aims at determining this optimal combination
of inputs so as to minimize the costs and hence maximize profits for
a given level of revenue.
• Major production decisions relates to the budget for the purchase
of inputs, distribution of the budget among the inputs, allocation of
inputs to each output and the combination of outputs.
• Dependency of inputs and outputs has to be understood and
production function makes this process easy.

3. PRODUCTION FUNCTION Contd…
• PRODUCTION FUNCTION
• A Production Function is the technological relationship
between the output and its inputs.
• Factors of production viz. Land, Labor, Capital,
Management and Technology determine output.
• Q = f(Ld, L, K, M, T)
• Q = Output
• Ld = Land employed in production
• L = Labor employed in production
• K = Capital employed in production
• M = Management employed in production
• T = Technology employed in production

4. PRODUCTION FUNCTION Contd…
• The importance of a factor of production varies from
product to product
• Example:
• Factor of Agricultural Manufacturing
Production product product
• Land Most important Relative lower
importance
• Management
and
Technology Lesser significance Greater
significance

5. PRODUCTION FUNCTION Contd…
• Generally, for the analysis of production decision
functions, labor and capital are the only two
factor inputs considered for convenience.
• Q = f(L,K)
• For a given level of output of commodity Q,
various combinations of L and K may be used.
• When more of labor (than capital) is employed,
the production process is known as labor
intensive production technique
• If more of capital is used in relation to labor, the
production technique becomes labor intensive

6. PRODUCTION FUNCTION Contd…
• PRODUCER’S EQUILIBRIUM
• A producer is in equilibrium when he or she
maximizes output for the given total outlay
• Different combinations of labor and capital
can be used to get the same level of output of
a commodity

7. LAW OF VARIBALE PROPORTIONS
• Definition of Law
• The Law of Variable Proportions is the new name of the
famous Law of Diminishing Returns.
•
→According to Stigler” "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 Paul Samulson "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".

8. LAW OF VARIBALE PROPORTIONS
Contd…
• The law of variable proportions states that as the quantity of one
factor is increased, keeping the other factors fixed, the marginal
product of that factor will eventually decline.
• This means that up to the use of a certain amount of variable factor,
marginal product of the factor may increase and after a certain
stage it starts diminishing. When the variable factor becomes
relatively abundant, the marginal product may become negative.
• Assumptions of Law.
• →Constant technology--- This law assumes that technology does
not change throughout the operation of the law.
• →Fixed amount of some factors.—One factor of production has to
be fixed for this law.
• → Possibility of varying factor proportions—This law assumes that
variable factors can be --changed in the short run.

9. LAW OF VARIBALE PROPORTIONS
Contd…
• Schedule:

10. LAW OF VARIBALE PROPORTIONS
Contd…
• ASSUMPTIONS:
• A farmer has 30 acres of land for cultivation
• Land is the fixed factor
• Investment in the form of tube well and
machinery is also fixed
• Only labor is the variable factor in this
example

11. RETURNS TO SCALE
• Law of returns to scale represents the long
term perspective of production analysis, when
all factors of production are variable.
• There are three types of return to scale:
• Constant returns to scale
• Increasing returns to scale
• Decreasing returns to scale

12. CONSTANT RETURNS TO SCALE
• This indicates that if all factors of production
are increased in a given proportion, then the
output produced would also increase in
exactly the same proportion
• That is, if the quantities of labor or capital or
both are increased by 10%, output would also
increase by 10%

13. INCREASING RETURNS TO SCALE
• This indicates, when all factors are increased
in a given proportion, output increases in a
greater proportion
• Thus, if labor and capital are increased by
10%, out increases by more than 10%
• Increasing returns to scale may occur because
of expansion in the scale of operation and
greater productive efficiency of managers and
labor due to greater specialization

14. DECREASING RETURNS TO SCALE
• This indicates that output increases in less than
proportion to the increase in factor inputs
• This may be due to the scale of operation beyond
the optimum plant capacity, over utilization of
machineries resulting in wear and tear an break
down leading to increased maintenance cost,
over working labor, managerial constrains in
over-seeing expanded business, waste of raw
materials, etc.