E-LESSON-7 MICRO ECONOMICS

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BBA/BCOM 2 All right are reserved with CU-IDOL Microeconomics Course Code: BBA103/BCM103 Semester: First e-Lesson: 7 SLM Unit: 7 www.cuidol.in Unit-7(BBA103/BCM103)

MICRO ECONOMICS 33 OBJECTIVES INTRODUCTION In this unit we are going to study Student will be able to understand the concept of about Production Function. Production. Under this you will be explain the Student will be able to analyze different types of behavior of a firm during three production function. stages of production. Student will be able to understand the concept of TP,MP,AP Will be able to Paraphrase the law of returns to scale Student will be able to understand the laws of return to scale. INSTITUTE OF DISTANACEll ArNigDhtOaNrLeINreEsLeErAvRedNIwNiGth CU-IDOL www.cuidol.in Unit-7(BBA103/BCM103)

TOPICS TO BE 4 COVERED  Production Function  Types of production Function  Law of Variable Proportion  Concepts of TP, MP, AP  Laws of Return to Scale www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

Production Function 5  Production: Combining inputs in order to get the output is production. It is the conversion of inputs into output.  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 www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

PRODUCTION FUNCTION 6 A production function can be represented in the form of a mathematical model of equation as Q = f ( a,b,c,…… etc.) where Q stands for quantity of output per unit of time and a, b, c, etc are the various factor inputs like land, capital, labour etc, which are used in the production of output. Technically production function can be written as Qx = f (L, N, K, R, E, T) It means quantity or output of x commodity depends upon the various factors such as land, labour, capital, raw material, efficiency parameter and technology. Qx = Quantity of x commodity L= Land N= Labour K= Capital R= Raw Material E= Efficiency Parameter T= Technology www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

TWO TYPES OF FACTOR 7 INPUTS FIXED INPUTS :  Fixed inputs are those factors the quantity of which remains constant irrespective of the level of output produced by a firm. For example, land, buildings, machines, tools, equipment, superior types of labour, top management etc. VARIABLE INPUTS :  Variable inputs are those factors the quantity of which varies with variations in the levels of output produced by a firm for example, raw materials, power fuel, water, transport, labour and communication etc. www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

TWO TYPES OF PRODUCTION FUNCTIONS 8  SHORT RUN In this case, the producer will keep all fixed factors as constant and changes only a few variable factor inputs. For example, Law of Variable Proportions.  LONG RUN In this case, the producer will vary the quantities of all factor inputs both fixed as well as variable in the same proportion. For example, the laws of returns to scale. www.cuidol.in Unit-7(BBA103/BCM103) 8All right are reserved with CU-IDOL

Difference between short run & long 9 run Basis Short Run Long Run Meaning Only variable factors are All factors are changed changed Price Determination Demand is active. Both demand & supply play an important role. Classification Factors are classified as fixed All factors are variable & variable www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

THE LAW OF VARIABLE PROPORTIONS 10 In the short-run the level of production can be changed by changing the factor proportions. This law examines the production function with on factor variable, keeping the other factors quantities fixed. The law explains the short-run production function. When the quantity of one input is varied, keeping other inputs constant, the proportion between factors changes. When the proportion of variable factors increases, the total output does not always increase in the same proportion, but in varying proportion. www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

ASSUMPTIONS OF THE LAW 11  Only one factor is variable while other factors are constant.  All units of variable factors are homogeneous.  Technology is constant  Factors of production can be used in different proportions.  This law is applicable in short time period.  Methods of production are constant. www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

PRODUCTION SCHEDULE Units of Fixed Input Units of Variable TP (Total AP (Average MP Description 12 (Land) Inputs (Labour) Product) Product) (Marginal Product) IRTF 2 1 3 3 3 (1st Stage) 2 2 8 4 5 2 3 15 5 7 CRTF 2 4 24 6 9 (2nd Stage) 2 5 28 5.6 4 2 6 31 5.1 3 DRTF 2 7 32 4.6 1 (3rd Stage) 2 8 32 4 0 2 9 31 3.4 -1 www.cuidol.in Unit-7(BBA103/BCM103) 1A2ll right are reserved with CU-IDOL

TP, AP AND MP 13 Total Product or Output (TP)  It refers to the total volume of goods produced during a specified period of time.  Total product (TP)can be raised only by increasing the quantity of variable factors employed in production. Average product  Average product can be known by dividing total product by the total number of units of the variable factor.  TP/Q Marginal Product or Output (MP)  It is output derived from the employment of an additional unit of variable factor unit.  The rate at which total product increases is known as marginal product.  Addition to the total product resulting from a unit increase in the quantity of the  variable factor. www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

RELATIONSHIP BETWEEN AP AND MP 14  When AP rises as a result of an increase in the quantity of variable input, MP is more then the average product.  When AP are maximum then MP is equal to AP. The MP curve cuts the AP curve at its maximum.  When AP falls as a result of decrease in quantity of variable input, MP is less than the AP. Three stages of production.  Stage 1- THE LAW ON INCREASING RETURNS.  Stage 2- THE LAW OF DIMINSHING RETURNS.  Stage 3- THE STATE OF NAGATIVE RETURNS www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

STAGE 1- THE LAW 15 ON INCREASING RETURNS.  TP increases at an increasing rate up to a point F.  MP also rises and is maximum at point F.  AP goes on rising.  After point F , TP rises but at diminishing rate.  MP falls but is positive.  Stage 1 ends where AP reaches its highest point. www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

STAGE 2- THE LAW OF 16 DIMINSHING RETURNS.  TP continues to increase at a diminishing rate, until it reaches it maximum point H.  Both MP and AP continuously fall during this stage.  Stage ends when TP reaches its maximum point H. www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

Stage 3- THE STATE OF NAGATIVE 17 RETURNS  TP declines.  MP negative.  AP is diminishing. www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

CONCLUSION 18  A rational producer will never produce in stage 3, where MP is negative.  A rational producer will also not produce in stage 1, where the MP of fixed factor is negative.  The producer producing in stage 1 will not be making best use of fixed factor and he will not be utilizing fully the opportunity of increasing production by increasing quantity of variable factor.  A rational producer will produce in stage 2, where both MP and AP of variable factors are diminishing. www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

LAW OF RETURNS TO SCALE 19 Law of Returns to scale is applicable in long run. In long run all factors of productions are considered to be changeable. It means in order to increase the scale of production; various units of factors of production are enhanced. Algebraically, the long run production function can be stated as under:- Qx = f (L, N, K, R, E, T) It means to enhance the quantity of X commodity, the quality of inputs such as land (L) capital (K) Raw-material (R) Efficiency parameter (E) and Technology (T) can also increase in the same proportion. www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

EXPLANATION 20 Assumptions: - • Returns are measured in physical terms. • All units of factors are homogeneous. Explanation:- Law of returns to scale refers to increase in production as the result of increase in all inputs in the same proportion. Let consider initial production function is Q = f (L, K) ............. (1) If both factors of production i.e. Land (L) and Capital (K) are increased in the same proportion (n), then new production function will be written as – Q1=f (nL, nK) www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

EXPLANATION 21  If Q1, increases more than proportionate increase in factors of production i.e. then it will be an example of increasing returns to scale.  If Q1 increases in the same proportion as increases in factors of production i.e. then it will be an example of constant returns to scale.  If Q1 increases less then proportionate increase in factors of production i.e. then it will be an example of decreasing returns to scale. www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

INCREASING RETURNS TO SCALE 22 If the proportional change in the output of an Increasing Returns to Scale organization is greater than the proportional change in Y inputs, the production is said to reflect increasing returns to scale. Q 25 For example, to produce a particular product, if the 20 15 quantity of inputs is doubled and the increase in Output 10 output is more than double, it is said to be an 5 increasing returns to scale. When there is an increase in the scale of production, the average cost per unit produced is lower. This is because at this stage an organization enjoys high economies of scale. 0 5 10 15 20 25 X Labour and Capital www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

CONSTANT RETURNS TO SCALE: 23 Constant returns to scale refers to the Y production situation where if all factors / Constant Returns to Scale inputs are increased in a given proportion, output increase in a same proportion. Output Q 25 For example, when inputs are doubled, so 20 X output should also be doubled, then it is a 15 case of constant returns to scale 10 5 0 5 10 15 20 25 Labour and Capital www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

DECREASING RETURNS TO 24 SCALE  Decreasing returns to scale refers to the Y production situation where all factors are / Decreasing Returns to Scale inputs are increased in a given proportions, output increase in a smaller proportion. Q  For example, when capital and labor is 25 doubled but the output generated is less than Output 20 doubled, the returns to scale would be termed 15 as diminishing returns to scale. 10 5 0 5 10 15 20 25 X Labour and Capital www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

Multiple Choice Questions 25 1. ______ shows the overall output generated at a given level of input: (a) Cost function (b) Production function (c) Iso cost (d) Marginal rate of technical substitution. 2. Increasing returns to scale can be explained in terms of: (a) External and internal economies (b) External and internal diseconomies (c) External economics and internal diseconomies (d) All of these Answers: 1. (b) 2. (a) www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

Multiple Choice Questions 26 3. The transformation of resources into economic goods and series is called: (a) Technical efficiency (b ) Input (c) Production (d) Increasing returns. 4.Laws of return apply to firms working in: (a) Perfect competition (b)Monopoly (c) Small firm (d) All kinds of market situations Answers: 3. (c) 4.(d) www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

SUMMARY 27  Law of variable proportion of says that as more and more of the factor input is employed, all other input quantities remaining constant, a point will eventually be reached where additional quantities of varying input will yield diminishing marginal contributions to total product.  Increasing Returns to Scale occurs if a proportional increase in all inputs under the control of a firm results in a greater than proportional increase in production..  Constant Returns to Scale occurs if a proportional increase in all inputs under the control of a firm results in an equal proportional increase in production.  Decreasing Returns to Scale occurs if a proportional increase in all inputs under the control of a firm results in a less than proportional increase in production.  Production function: A function that states the maximum amount of an output that can be produced with a certain combination of inputs, within a given period of time and with a given level of technology.  Short-run: The time period during which at least one input is fixed.  Variable inputs: Inputs that can be varied easily and on very short notice. www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

FAQ’S 28 Q 1. Difference between short run & long run? Ans:-In short run only variable factor is changed whereas in long run all varibles are changed. For More details refer SLM. Q 2. Define Law of variable proportion? Ans: Law of variable proportion of says that as more and more of the factor input is employed, all other input quantities remaining constant, a point will eventually be reached where additional quantities of varying input will yield diminishing marginal contributions to total product. For More details refer SLM. Q 3.Explain Law of return to scale? Ans: Law of returns to scale refers to increase in production as the result of increase in all inputs in the same proportion. For More details refer SLM. www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

REFERENCES 29 1. Dwivedi D.N. , Managerial Economic, Vikas Publications, New Delhi. 2. Mithani D.M. , Managerial Economics Theory and Applications, Himalaya Publication, Mumbai. 3. http://www.economicsdiscussion.net/production-function/production-function-meaning-definitions- and-features/6892 4. https://www.toppr.com/guides/economics/production-and-costs/production-function/ www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL

30 THANK YOU For queries Email: [email protected] www.cuidol.in Unit-7(BBA103/BCM103) All right are reserved with CU-IDOL