This presentation puts emphasis on Law of Variable proportion and Law of Returns to Scale It also puts light on production function, cost function, etc.

1. Done by
Amara Bandukada
Umme Baba
Ayush Parekh
Suchit Chauhan
Arul Collins
A1 Batch

3. • Economics is the study of the
• production and consumption of goods
• transfer of wealth to produce and obtain those
goods.
• Economics explains how people interact within
markets to get what they want or accomplish certain
goals.

4. Macroeconomics
 Macroeconomics
contains broader view by
analyzing the economic
activity of an entire
country or the
international
marketplace.
 Microeconomics focuses
on the actions of
individuals and
industries, like the
dynamics between
buyers and sellers,
borrowers and lenders.
Microeconomics

6. • A production function is an equation, table or graph, which
specifies the maximum quantity of output, which can be
obtained, with each set of inputs.
• Prof. Richard H. Leftwich states that production function refers
to the relationship between inputs and outputs at a given
period.
(Inputs = resources such as land, labor, capital and
organization used by a firm
Outputs = goods or services produced by the firm)

7. • It is written as Q = F(X1, X2… Xn).
• Where Q is the maximum quantity of output and X1, X2,… Xn are the
quantities of the various inputs.
If there are only two inputs, labor L and capital K, we write the equation as
Q = F(L,K).
• The concept of production function stems from the following two
things:
• 1. It must be considered with reference to a particular period.
• 2. It is determined by the state of technology. Any change in technology
may alter output, even when the quantities of inputs remain fixed.

8. • Total Product : It is the total output or quantity that is produced by a
firm using fixed and variable factors at a given point of time.
• Average Product : It is defined as the product produced per unit of
variable input employed when fixed inputs are held constant.
Average Product = (Total Product) / (Variable Inputs Employed)
• Marginal Product : It is defined as the change in total product that
comes as a result of a one unit increase in the variable input.
Marginal Product = (dTP) / (dVI)
(where TP is total product and VI is variable inputs. )

11.  Prof. Marshall stated, “An increase in the quantity of a
variable factor added to fixed factors, at the end results
in a less than proportionate increase in the amount of
product, given technical conditions.”

12.  Only one variable factor unit is to be varied while all
other factors should be kept constant
 Different inits of variable factor are homogenous
 Techniques of production remain constant
 The law will hold good only short and a given period
 There are possibilities of varying the proportion of
factor inputs.

15.  The proportion of variable factors is greater than the
quantity of fixed factors. Hence both AP and MP
decline.
 Total output diminishes because there is a limit to the
full utilization of indivisible factors and introduction
of specialization. Hence Output declines.
 Imperfect suitability of factor inputs is another cause.
Up to certain point substitution is beneficial, once
optimum point is reached, the fixed factors cannot be
compensated by the variable factor.

17. The law of returns to scale examines the
relationship between output and the scale of inputs
in the long-run when all the inputs are increased in
the same proportion.

18.  All the factors of production (such as land, labor and
capital) but organization are variable
 The law assumes constant technological state. It
means that there is no change in technology during
the time considered
 The market is perfectly competitive
 Outputs or returns are measured in physical terms.

19. •The law of increasing returns
• The law of constant returns
•The law of decreasing returns

20. Unit Scale of Production Total Returns Marginal Returns
1
1 Labor + 2 Acres of
Land
4
4 (Stage I -
Increasing Returns)
2
2 Labor + 4 Acres of
Land
10 6
3
3 Labor + 6 Acres of
Land
18 8
4
4 Labor + 8 Acres of
Land
28
10 (Stage II -
Constant Returns)
5
5 Labor + 10 Acres of
Land
38 10
6
6 Labor + 12 Acres of
Land
48 10
7
7 Labor + 14 Acres of
Land
56
8 (Stage III -
Decreasing Returns)
8
8 Labor + 16 Acres of
Land
62 6

23. Production function
 A production function relates
physical output of a production
process to physical inputs or factors
of production
Cost function
 The cost-of-production theory of
value is the theory that the price of
an object or condition is determined
by the sum of the cost of the
resources that went into making it.
The cost can comprise any of the
factors of production (including
labor, capital, or land) and taxation.

24. Total Cost
 Total cost in economics includes the
total opportunity cost of each factor
of production as part of its fixed or
variable costs.
 The total product (or total physical
product) of a variable factor of
production identifies what outputs
are possible using various levels of
the variable input
Total Product

25. Average cost
 Average cost or unit cost is equal to
total cost divided by the number of
goods produced (the output
quantity, Q). It is also equal to the
sum of average variable costs (total
variable costs divided by Q) plus
average fixed costs (total fixed costs
divided by Q)
 Average product is the per unit
production of a firm. Conceptually,
it is simply the arithmetic mean of
total product calculated for each
variable input over a whole range of
variable input quantities
Average Product

26. Marginal cost
 Marginal cost is the change in the total
cost that arises when the quantity
produced has an increment by unit. That
is, it is the cost of producing one more
unit of a good. In general terms,
marginal cost at each level of production
includes any additional costs required to
produce the next unit
 The marginal product of an input (factor
of production) is the extra output that
can be produced by using one more unit
of the input (for instance, the difference
in output when a firm's labor usage is
increased from five to six units),
assuming that the quantities of no other
inputs to production change
Marginal product

28. Law of Variable
Proportions
 Short period
 Only one factor is varied
 The factor ratio remains
changed
 There are three stages:
a) Increasing returns to
factor.
b) Diminishing returns to
factor
c) Negative returns to factor
 Productions is of variable
type
 Long period
 All factors varied
 The factor ratio remains
unchanged
 There are three stages:
 a) Increasing returns to scale
 b)Decreasing returns to scale
 c)Constant returns to scale
 Productions is of constant type
Law of Returns to
Scale

29.  SHORT RUN
• Short run is defined as a period when production
can be increased only with increase in variable
factors .
 LONG RUN
• Long run is defined as a period which allows the
firm to change their sizes and scales to increase
output

30.  SHORT RUN
• The short run as the time horizon over which the scale of
operation is fixed and the only available business decision is
the number of workers to employ.
• Quantity of labor is variable but quantity of capital and
production processes are fixed
 LONG RUN
• The long run as time horizon is needed for a producer to
have flexibility over all relevant production decisions
• Long run: Quantity of labor, quantity of capital, and
production processes are all variable

31.  SHORT RUN
• In the short run, firms have already chosen whether
to be in business and at what scale and technology of
production.
• The number of firms in an industry is fixed
 LONG RUN
• In the long run, firms have the flexibility to fully enter
or exit an industry.
• The number of firms in an industry is variable since
firms can enter and exit

32.  SHORT RUN
• Firms will produce if the market price at least covers variable
costs, since fixed costs have already been paid and, as such,
don't enter the decision-making process.
• Firms' economic profits can be positive, negative or zero.
 LONG RUN
• Firms will enter a market if the market price is high enough to result
in positive economic profit.
• Firms will exit a market if the market price is low enough to result in
negative economic profit.
• If all firms have the same costs, firm profits will be zero in the long
run in a competitive market

34.  It is helpful in understanding clearly the process of
production.
 The law tells us that the tendency of diminishing
returns is found in all sectors of the economy .
 The law tells us that any increase in the units of
variable factor will lead to increase in the total product
at a diminishing rate.

35.  This law may not apply universally to all kinds of
productive activities .
 This law has been found to operate in agricultural
production more regularly than in industrial
production.
 If increasing units of an input are applied to the fixed
factors, the marginal returns to the variable input
decrease eventually.