Production analysis or the theory of production deals with the general relationship of output of goods or services with factor inputs. Normally, a physical output is related to analysis. Likewise revenue productivity which is related with economic environment and the general equilibrium of demand and supply is left out in a pure production analysis physical productivity based on operating efficiency alone. The profitability of a productive activity would depend upon the revenue realised from the output and the cost incurred in raising that output.
Production Function
Production function states the relationship between inputs and output. The output takes the form of volume of goods or services and the inputs are the different factors of production i.e. land, labour, capital and enterprise.
Production function can also be defined in a different way. It shows the minimum quantities of various inputs that are required to yield a given quantity of output.
The production function of a firm can be studied by holding the quantities of some factors fixed, while varying the amount of other factors. This is done when the law of variable proportion is derived. The production function can also be studied by varying the amounts of all factors. The behaviour of production when all factors are varied is the subject matter of the laws of returns to scale.
Quantity of Total Average Marginal
Product Schedule
We find that when one unit of labour is employed, the total product is 100 units. When two units of labour are employed, the total product rises 210 units. The total product goes on rising as more and more units of labour are employed. With 10 units of labour, the total product rises to 760 units. When 11 units of labour are employed, total product falls to 740 units.
Average Product (AP): Average product is the total product per unit of the variable factor. It is shown as a schedule in column (3) of the Table. When one unit of labour is employed average product is 100, when two units of labour are employed average product rises to 105.
Marginal Product (MP): Marginal product is the change in total product per unit change in the quantity of variable factor. In other words, it is the addition made to the total production by an additional unit of input.
The computed value of the marginal product appears in the last column of the Table. For example, the MP corresponding to 4 units is given as 100 units. This reflects the fact that an increase in labour from 3 to 4 units increased output from 330 to 430 units.
Relationship between Average Product and Marginal Product: Both average product and marginal product are derived from the total product. Average product is obtained by dividing total product by the units of variable factor and marginal product is the change in total product resulting from a unit increase in the quantity of variable factor.
Law of Variable Proportions
It refers to input-output relationship, when the output is increased by varying the quantity of one input. This law operates in the short run when all the factors of production cannot be increased or decreased simultaneously. The law operates under certain assump-tions which are as follows:
The state of technolgy is assumed to be given and unchanged. If there is any improvement in technology, then marginal and average product may rise instead of falling.
There must be some inputs whose quantity is kept fixed. This law does not apply to cases when all factors are proportionately varied. When all the factors are proportionately varied, laws of returns to scale are applicable.
The law does not apply to those cases where the factors must beused in fixed proportions to yield product. When the various factors are required to be used in fixed proportions, then an increase in one factor would not lead to any increase in output.
We consider only physical inputs and outputs and not economic profitability in monetary terms.
The law states that as we increase the quantity of one input which is combined with other fixed inputs, the marginal physical productivity of the variable input must eventually decline.
In short we can say that production means creation or addition of utility. Production does not include domestic work, voluntary services, leisure time activities etc. For the production process to work, there must exist factors with which to produce goods and services. Factors of production are classified as land, labour, capital and entrepreneure. Land includes all those natural resources whose supply for the economy as a whole is fixed. Labour is any mental or physical exertion directed to product goods or services. Capital is a produced means of production and it comprises man-made machines and materials which are used for further production. Entrepreneur is the person who bears the risk and uncertainties of business.
Factors of production can be divided into two categories—fixed factors and variable factors. Fixed factors are those factors whose quantity remains unchanged in short run. Variable factors change with a chage in the level of output. The production level can be changed by changing the factor proportions in which variable factors are used. The production-scale can be changed by changing all factors together. When some factors are kept fixed and others are varied, the law of variable proportions is applicable. The law states that as increased quantity of the variable input must eventually decline. The law of variable proportions is applicable in the short-run. In the long-run, all factors are vaiable and thus they can be varied easily. When this is done, we may have increasing, constant or diminishing returns to scale. Returns to scale occur due to economies of scale. Economies of scale are of two kinds—external economies of scale and internal economies of scale. External economies of scale accrue to a firm due to factors which are external to it and internal economies of scale accrue to a firm when it engages in large scale production. Increase in scale, beyond the optimum level, result in diseconomies of scale.
A firm is generally interested to know which combination of factors of production yields optimum or maximum level of output.
