Production Analysis | Managerial Economics | Chapter 04 [2020]

Описание: This video explains about Production analysis in Managerial Economics.


4.1 Introduction:
A business firm is an economic unit. It is called as a production unit. Production is the most important activities of a firm in the circle of economic activities

4.2 Meaning of production
The term production means transformation of physical inputs into physical outputs.
Four factors of production like land, labour, capital and organization are inputs.
Inputs can be physical as well as intangible like experience, talents, ability, knowledge etc.
What we get at the end of the productive process is called as outputs.
Production always results in creation of utility or addition of values.

4.3 Production function
A production function expresses the technological relationship between physical quantity of inputs employed and physical quantities of output obtained by a firm.
It specifies a flow of output resulting from a flow of inputs during a specified period of time.
It is also called Input-output relationship.
Production function, in economics, is equation that expresses the relationship between the quantities of productive factors (such as labour and capital) used and the amount of product obtained.
It states the amount of product that can be obtained from every combination of factors, assuming that the most efficient available methods of production are used.
Mathematically, production function can be expressed as:
Q=f(L,K…),where Q stands for quantity of output produced per unit of time. And L,K are various factors as labour and capital which are primarily used in production of output.
Factor input Types
Fixed inputs: Fixed inputs are those factors which remain constant at all levels of output produced by a firm. Land, building, machines, equipment, management etc. come under fixed inputs.
Variable inputs: Variable inputs are those factors which vary with variations in the levels of output produced by a firm. Raw materials, fuels, water, transport and communication ,chemicals, labour, advertisement etc. come under this category.

4.4 Types of Production Function

1) Short-run production function:
Short-run is a period of time in which only the inputs can be varied while fixed inputs would remain constant.
Quantities of fixed inputs will be kept constant and the other inputs, say labour, will be varied as per the requirements in output.
The Law of Variable Proportion is the example of short-run production function.
2) Long-run production function:
Long-run is a period time where the producer will have adequate time to make any short of changes in the factor combination. In this case, the producer will vary the quantities of all factor inputs, both fixed as well as variable, in the same proportion. The Law of Returns to Scale is the example of long-run production function.

It is assumed that each firm has its own production function which is determined by the state of technology, managerial ability and organizational skills.
If there are any improvements in them, the old production function is disturbed and a new one takes its place.

4.5The Law of Variable Proportion
Assumptions:

(i) Constant Technology:
(ii) Factor Proportions are Variable:
(iii) Homogeneous Factor Units:
.(iv) Short-Run:
The law operates in the short-run when it is not possible to vary all factor inputs.

Three Stages of the Law
1.First Stage:
First stage starts from point ‘O’ and ends up to point F. At point F average product is maximum and is equal to marginal product. In this stage, total product increases initially at increasing rate up to point E. between ‘E’ and ‘F’ it increases at diminishing rate. Similarly marginal product also increases initially and reaches its maximum at point ‘H’. Later on, it begins to diminish and becomes equal to average product at point T. In this stage, marginal product exceeds average product (MP AP).

2. Second Stage:
It begins from the point F. In this stage, total product increases at diminishing rate and is at its maximum at point ‘G’ correspondingly marginal product diminishes rapidly and becomes ‘zero’ at point ‘C’. Average product is maximum at point ‘I’ and thereafter it begins to decrease. In this stage, marginal product is less than average product (MP AP).

3.Third Stage:
This stage begins beyond point ‘G’. Here total product starts diminishing. Average product also declines. Marginal product turns negative. Law of diminishing returns firmly manifests itself. In this stage, no firm will produce anything. This happens because marginal product of the labour becomes negative. The employer will suffer losses by employing more units of labourers. However, of the three stages, a firm will like to produce up to any given point in the second stage only.

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