Producer Behaviour and Supply, Class 12, Economics Chapter Notes - Commerce PDF Download

Production: Combining inputs in order to get the output is production.

Production Function: It is the functional relationship between inputs and output in a given state of technology. Q= f(L,K)

Q is the output, L: Labor, K: Capital

Fixed Factor: The factor whose quantity remains fixed with the level of output.

Variable Factor:  Those inputs which change with the level of output.

Here units of capital used remain the same for all levels of output. Hence it is the fixed factor.

Amount of labor increases as output increases. Hence it is a variable factor.

PRODUCTION FUNCTION AND TIME PERIOD

1. Production function is a long period production function if all the inputs are varied.
2. Production function is a short period production function if few variable factors are combined with few fixed factors.

CONCEPTS

Time period, can be classified as:

1. Very short period or market period
2. Short period / short run
3. Long period / long run

Market period : is that period where supply / output cannot be altered or changed.

Short period / run : is that period where supply / output can be altered / changed by changing only variable factors of production. In other words fixed factors of production remain fixed.

Long period : is that period where all factors of production are changed to bring about changes in output / supply. No factor is fixed.

Difference between short run & long run :

Concept of product :- Refers to volume of goods produced by a firm or an industry during a specific period of time.

Concepts of product:

Total Product- Total quantity of goods produced by a firm / industry during a given period of time with given number of inputs.

Average product = output per unit of variable input.

APP = TPP / units of variable factor

Average product is also known as average physical product.

Marginal product (MP): refers to addition to the total product, when one more unit of variable factor is employed.

MP_n = TP_n – TP_n-1

MP_n = Marginal product of nth unit of variable factor

TP_n = Total product of n units of variable factor

TP_n-1= Total product of (n-1) unit of variable factor.

n=no. of units of variable factor

MP = ΔTP / Δn

We derive TP by summing up MP

TP = ∑MP

LAW OF VARIABLE PROPORTION OR RETURNS TO A VARIABLE FACTOR

Statement of law of variable proportion: In short period, when only one variable factor is increased, keeping other factor inputs constant, the total Physical  product (TPP) initially increases at an increasing rate, MPP increases, then TPP increases at a decreasing rate, MPP falls but remains positive and finally TPP decreases, MPP becomes negative.  

MPP initially increase then falls but remains positive then 3^rd phase becomes negative.

Explanation of law of variable proportion with a schedule and a diagram

Schedule of Law of variable proportion

Diagram

Phase I / Stage I / Increasing returns to a factor.

• TPP increases at an increasing rate
• MPP also increases.

Phase II / Stage II / Diminishing returns to a factor

• TPP increases at decreasing rate

• MPP decreases / falls
• This phase ends when MPP is zero & TPP is maximum

Phase III / Stage III / Negative returns to a factor

• TPP diminishes / decreases
• MPP becomes negative.

Reasons for increasing returns to a factor

• Better utilization of fixed factor
• Increase in efficiency of variable factor.
• Optimum combination of factors

Reasons for diminishing returns to a factor

• Indivisibility of factors.
• Imperfect substitutes.

Reasons for negative returns to a factor

• Limitation of fixed factors
• Poor coordination between variable and  fixed factor
• Decrease in efficiency of variable factors.

Relation between MPP and TPP

• As long as MPP increases, TPP increases at an increasing rate.
• When MPP decreases, TPP increases diminishing rate.
• When MPP is Zero, TPP is maximum.
• When MPP is negative, TPP starts decreasing.