Title mepa unit 3.pdf ✅

Unit 3 Production Analysis (Page no. 1-18) Cost Analysis (Page no. 19-31) Break-Even Analysis (Page no. 32-37) Market Structures (Page no. 38-46) www.apnenotes.co
Downloaded from www.apnenotes.co 1 Production Analysis Introduction  Production implies provision of goods and services or commodities.  In technical sense, it is the transformation of resources into commodities over time and space. Production is an act of converting or transforming inputs into output.  Production process is carried out by a firm. The firm takes up the responsibility of combining various inputs in different quantities and proportions to produce different levels of output. Production function  Production function is a technological-physical relationship between inputs and output.  It is an engineering concept and widely used in business economics to study production behaviour.  It is economist summary of technical knowledge.  Definition: A production function refers to the functional relationship, under the given technology, between physical rates of input and output of a firm, per unit of time. Algebraic statement of production function  Q = f (L, M, N, K, T)  Where Q stands for the output of a good per unit of time  L for labour, M for management (or organisation), N for land (or natural resources), K for capital and T for given technology, and f refers to the functional relationship.  The production function with many inputs cannot be depicted on a diagram. Moreover, given the specific values of the various inputs, it becomes difficult to solve such a production function mathematically.  Economists, therefore, use a two –factor or two-input production function. If labour and capital are taken as two inputs, the production function assumes the form:  Q = f (L, K)  The production function as determined by technical conditions of production is of two types: it may be rigid or flexible. The rigid relates to the short-run and flexible relates to the long run Laws of production  In production function, we study different combinations of inputs producing various quantities of output under different technical conditions.  The production function has been explained by different economists in different ways to formulate laws relating to the relationship between inputs and output.
Downloaded from www.apnenotes.co 2 Law of variable proportions  Traditional economists have explained the concept under “Law of Diminishing Marginal Returns.”  Modern economists have explained it under “Law of Variable Proportions”. Therefore, it is called the modern version of the law of diminishing marginal returns.  Only one factor of production is variable, other factors are fixed.  ‘As the firm increases the quantity of variable factor, while keeping other factors constant, the output may increase more than proportionately in the initial stages of production, but finally it will not increase proportionately. Conditions or assumptions  Only one factor is variable, other factors are fixed  Scale of production is unchanged and the plant size and efficiency remains unchanged.  Technique of production remains constant  All the units of the variable factors are homogeneous i.e., have identical characteristics and equal efficiencies Statement of the law  The elaborate statement of the law is as follows: “In the short-run, as the quantity of variable factors is increased, other things remaining same, output (returns to factors varied) will increase more than proportionately to the quantity of variable inputs in the beginning, that it may increase in the same proportion and ultimately it will increase less proportionately”.  To clarify the relationship further, the following measurements are adopted: A. Total Product (TP): Total number of units of output produced per unit of time by all factor inputs is referred to as total product. • Total product increases with an increase in the variable factor input: • Thus TP = f(QVF), where TP is the total product and QVF is the quantity of variable factor. B. Average Product (AP): Average product refers to the total product per unit of a given variable factor. • Thus, by dividing the total product with the quantity of variable factor, we get average product. • Symbolically AP = TP/QVF. C. Marginal Product (MP): Owing to the addition of a unit to a variable factor, all other factors being held constant, the additional product realised in the total product is technically referred to as the marginal product. • In formalised terms the marginal product may be defined thus: MPn = TPn – TPn-1 • n=QVF • or MP = ΔTP/ΔQVF
Downloaded from www.apnenotes.co 3 Statement using the concept of marginal product  Using the concept of marginal product the law may be restated as follows: “ During the short period, under the given state of technology and other conditions remaining unchanged, with the given fixed factors, when the units of a variable factors are increased in the production function in order to increase the total product, the total product initially may rise at an increasing rate and after a certain point, it tends to increase at a decreasing rate because the marginal product of the variable factor in the beginning may tend to rise, but eventually tends to diminish.  To illustrate the working of this law , a hypothetical production schedule is considered: Units of fixed input Units of variable input Total product Average product Marginal product Stages of production 1 acre 1 20 20 20 Stage-I 1 acre 2 50 25 30 1 acre 3 90 30 40 1 acre 4 120 30 30 Stage-II 1 acre 5 135 27 15 1 acre 6 144 24 9 1 acre 7 147 21 3 1 acre 8 148 18.5 1 1 acre 9 148 16.4 0 1 acre 10 145 14.5 -3 Stage-III