MODULE 3

THEORY OF PRODUCTION Production refers to transformation of inputs to outputs. All sorts of production is as a result of four factors of production; Land, Labour, Capital and Organisation. No single commodity can be produced without the help of any of these factors of production. Theory of production is concerned with: A) Production Function B) Laws of Production or Laws of Returns PRODUCTION FUNCTION Production Function refers to the functional relationship between the quantity of a good produced ( output) and factors of production (inputs). It illustrates the maximum amount of output which can be obtained from given inputs. Professor Watson defined production function as the relation between a firms physical production (output) and the material factors of production(output). In this way production function reflects how much output we can expect if we have so much of so much of labour and so much of capital etc. Like demand function, production function is for definite period. With every development in the technology, production function of the firm undergoes change. Mathematically , production function may be expressed as; Q = f(L, C, N) Where, Q= Quantity of output, L = Labour, , C= Capital, N = Land.) Hence the level of output(Q) depends on the quantities of different inputs (L, C, N,) available to the firm. FEATURES OF PRODUCTION FUNCTION Production function presumes the following features; 1. Substitutability : The factors of production or inputs are substitutes of one another which make it possible to vary the total output by changing the quantity of one or few inputs, while the quantities of all other inputs are held constant. 2. Complementarity:The factors of production are also complementary to one another, that is, the two or more inputs are to be used together as nothing will be produced if the quantities of either of inputs used in the production function is zero. 3. Specificity: It reveals that the inputs are specific to the production of a particular product. Machines and equpiments, specialized workers and raw materials are a few examples of the specificity .

TYPES OF PRODUCTION FUNCTION 1. Short run Production Function : In short, it is possible to raise the quantities of one input while keeping the quantities of other inputs constant. This aspect is known as law of variable proportion. When a producer brings change in his production by changing only one factor of production, and as a result there is change in the proportion of combination of factors of production. Then this proportional relationship between inputs and outputs is referred to as returns to a factor. 2. Long run Production Function: In the long run , it is possible for a firm to change all inputs according to its scale. This is known as returns to scale. In this case, producer changes all the factors of production in the