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THEORY OF Production

THEORY OF Production. PRODUCTION THEORY. Labour + capital = Output. THEORY OF PRODUCTION EXPLAIN A INPUT-OUTPUT RELATIONSHIP, A FIRM SO AS TO MINIMIZE COST OF PRODUCTION. Isoquants .

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THEORY OF Production

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  1. THEORY OF Production

  2. PRODUCTION THEORY Labour + capital = Output THEORY OF PRODUCTION EXPLAIN A INPUT-OUTPUT RELATIONSHIP, A FIRM SO AS TO MINIMIZE COST OF PRODUCTION.

  3. Isoquants • Similar to IC curve, Equal-product curve or isoquants represents all those input combinations which are capable of producing the same level of output.

  4. Isoquants continue…. Various factors combination Isoquants

  5. Total physical product (TPP)

  6. Average physical product (APP) • APP = TPP / amount of input

  7. Marginal physical product (MPP) • the additional output that results from the use of an additional unit of a variable input, holding other inputs constant • measured as the ratio of the change in output (TPP) to the change in the quantity of labor (or other input) used

  8. Computation of MPP and APP • Note that the MPP is positive when an increase in labor results in an increase in output; a negative MPP occurs when output falls when additional labor is used.

  9. TPP

  10. Shape of MPP curve • MPP rises when TPP increases at an increasing rate, and declines when TPP increases at a decreasing rate. • MPP is negative if TPP declines when labor use rises

  11. Relationship of APP and MPP • APP rises when MPP > APP • APP falls when MPP < APP • APP is maximized when MPP = APP

  12. Law of variable factor proportion

  13. Production function • The functional relationship between physical inputs and physical outputs of a firm is known as production function. Algebraically production function can be written as q= f(a,b,c,d……..) • Where q stands for quantity of output and a,b,c,d stand for quantity of factors of production. f denotes for unspecific relationship between inputs and outputs.

  14. Production function ..continue • In economics we are interested in two types of production functions:- • (i) Law of variable factor proportion (law of diminishing returns) • (ii) Return to scale

  15. Forms of production functions • Linear homogenous production function It implies that if inputs increase in same proportion outputs increase in same proportion, it is known as HPF of first degree. • Cobb-Douglas production function.

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