Friday, February 21, 2014

The laws of production


The laws of production

Production function shows the relationship between a given quantity of input and its maximum
possible out put.
Given the production function,
the relationship
between additional quantities of
input and the additional
output can be easily obtained. This kind of

relationship yields  the law of
production The  traditional theory of  production  studies  the marginal
input-output relationship under
(I) Short run; and (II) long run. In the short run, input-output relations
are studied with one variable
input,  while other inputs
are  held  constant .The
Law of  production
under these
assumptions  are
called “ the Laws of variable production”.  In the long run input output
relations  are
studied assuming
all  the input  to
be  variable. The long-run input output relations are studied under `Laws of Returns to
Scale.







Law of Diminishing Returns (Law of Variable Proportions)

The Laws of returns states the relationship between the variable input and the output in the short term. By definition certain factors of production (e.g.-Land, plant, machinery etc) are available in short supply during the short run . Such factors which are available in unlimited supply even during the

short periods
are
known as  variable factor.  In short-run  there fore ,the  firms can employ a  limited or
fixed quantity
of
fixed  factors  and an unlimited
quantity
of
the variable  factor . In other  words,
firms  can employ  in  the  short  run  varying
quantities of
variable inputs against given quantity of
fixed
factors. This kind of change in input combination leads to variation in factor proportions.
The
Law which brings out  the  relationship between varying factor
properties and
output
are there fore
known as the Law of variable proportions..








The variation in inputs lead to a disproportionate increase in output more and more units of
variable  factor  when
applied  cause an  increase in
output but  after a point the extra output will
grow
less
and less. The
law which brings out
this
tendency in
production is
known
as‟ Law of
Diminishing Returns`










The Law of Diminishing returns levels that any attempt to increase output by increasing only
one
factor  finally faces
diminishing returns.
The Law states that when some factor remain constant
,more and more units
of a
variable  factor are
introduced the production  may increase
initially
at an
increasing  rate; but after a point it increases only  at diminishing
rate. Land  and capital remain fixed in
the short-term whereas labour shows a variable nature.





The following table explains the operation of the Law of Diminishing Returns.
No. of
Total
Average
Marginal
Workers
product
product
Product
1
10
10
10
2
22
11
12
3
36
12
14
4
52
13
16
5
66
13.2
14
6
76
12.7
10
7
82
11.7
6
8
85
10.5
3




9
85
905
0




10
83
8.3
(-2)





The above table illustrates several important features of a typical production function .With one
variable  input.- here both  Average
Product
(AP) and Marginal Product (MP)
first
rise ,reach  a
maximum - then
decline. Average product is
the
product for one unit
of labour . It is arrived at
by dividing the
Total Product (TP)
by number
of workers Marginal
product is
the
additional
product resulting term additional labour.  It is found out by dividing the change in total product by the
change in the number of workers. The total output increases at an increasing rate till the employment
of the 4th worker. The rate of increase in the marginal product reveals this .Any additional labour
employed beyond  the 4th  labour clearly faces the operation of the Law of  Diminishing Returns. The
maximum marginal product is 16 after which it continues to fall , ultimately becoming negative. Thus
when more and more units of labour are combined with other fixed factors the total output  increase
first at an increasing rate then at a diminishing rate finally it becomes negative.
The graphical representation the above table is shown below

.


OX  axis
represents  the  units  of  labour
and
OY
axis
represents
the  unit  of  output . The  total
output(TP)curve has a
steep  rise  till  the
employment
Of
the
4th
worker. This
shows that the
output increases at an increasing rate till the
employment of the 4th
labour . TP curve still goes on
increasing but only at a diminishing rate. Finally TP curve shows a downward trend.




The Law of Diminishing
Returns operation at three stages .At the first stage, total product
increases
at
an
increasing  rate .The marginal
product at
this stage

increases at an
increasing
Rate
resulting
in  a  greater  increases  in  total  product .The average
product  also
increases.  This
Stage
continues up
to
the point where average  product is
equal to
marginal
product .the law  of increasing
returns is in operation at this stage


















The
Law of increasing Returns operates from the second

stage
on wards .At the second
stage , the
total
product  continues to
increase
but
at
a
diminishing
rate .
As the marginal product
at this stage starts falling ,the average product also
declines . The
second
stage comes to  an end
where
total
product
become
maximum
and
marginal
product

becomes
zero.
The marginal
product
becomes negative in  the
third  stage. So the total product also declines. The average product
continues to decline in the third stage.
Assumptions of Law Diminishing Returns

The Law of Diminishing Returns is based on the following assumptions;-Returns is based on the following assumptions;-

1.      The production technology remains unchanged

2.      The variable factor is homogeneous.

3.      Any one factor is constant

4.      The fixed factor remains constant.

Law of Returns to scale

In the long –run all the factor of production are variable ,and an increase in output is possible by increasing all the inputs. The Law of Returns to scale explains the technological relationship

between  changing scale  of
input and  output. The law  of  returns of scale explain how a simultaneous
and proportionate  Increase in  all  the
inputs
affect  the
total  output. The increase in output  may be
proportionate ,
more than
proportionate or
less  than
proportionate.  If
the
increase  in  output  is
proportionate
to the  increase in input ,
it is
constant Returns to scale .If It
is
less then proportionate
it is diminishing returns  to
scale . The
increasing returns to the scale comes
first ,then constant and
finally diminishing returns to scale happens.






Increasing Returns to scale


When proportionate increase in all factor of production results in a more than proportionate increase in output and this results first stage of production which is known as increasing returns to scale. Marginal output increases at this stage. Higher degree of specialization, falling cost etc will lead higher efficiency which result increased returns in the very first stage of production.




Constant Returns to scale


Firms cannot maintain increasing returns to scale indefinitely after the first stage , firm enters a stage when total output tends to increase at a rate which is equal to the rate of increase in inputs. This stage comes in to operation when the economies of large scale production are neutralized by the diseconomies of large scale operation.


Diminishing Returns to Scale


In this stage ,a proportionate increase in all the input result only less than proportionate increase in output . This is because of the diseconomies of large scale production. When the firm grows further, the problem of management arise which result inefficiency and it will affect the position of output.
Economies of Scale









The  factors
which cause the
operation of the laws
of  returns the scale are grouped under economies
and diseconomies  of scale . Increasing
returns to
scale operates because of economies  of scale and
decreasing
returns
to
scale
operates
because of  diseconomies  of
scale   where  economies  and
diseconomies  arise
simultaneously.  Increasing
returns to  scale  operates  when economies  of scale
are  greater
then
the
diseconomies
of
scale
and
returns to   scale
decreases when  diseconomies
.overweight
the
economies
of  scale
. Similarly  when  economies and
diseconomies are  in  balance
,returns to scale becomes constant.






When a firm increases
all the factor of production it enjoys the same advantages of
economies of production . The economies of scale are classified as ;

 1.  Internal economies.

2.  .External economies

Internal economies of scale

Internal economies are those which arise form the explanation of the plant-size of the firm .Internal economies of scale may be classified;-


(a)    Economies in production.

(b)     Economies in marketing

(c)    Economies in economies

(d)   Economies in transport and storage

A . Economies in production :-it arises term

1.      Technological advantages

2.      Advantages of division of labour and specialization

B . Economies in marketing;-It facilitates through
1.      Large scale purchase of inputs.

2.      Advertisement economies ;

3.      Economies in large scale distribution

4.      Other large-scale economies

C . Managerial economies ;- It achieves through

1.      Specialization in management

2.      Mechanization of managerial function.

D . Economies in transport and storage

Economies in transportation and storage costs arise form fuller utilization of transport and storage facilities.

External Economies of scale
External  or pecuniary economies to large size firms arise from the discounts available  to it due

to;


1
. Large scale purchase of raw materials

2
. Large scale acquisition of external finance at low interest

3
. Lower advertising rate fun advertising media.

4
. Concessional transport charge on bulk transport.

5.
Lower  wage  rates  if  a  large  scale   firm  is  monopolistic  employer
of  certain  kind  of

specialized labour


Thus External economies of scale are strictly based on experience of large –scale firms or well managed small scale firms. Economies of scale will not continue for ever. Expansion in the size of the firms beyond a particular limit , too much specialization, inefficient supervision, Improper labour relations etc will lead to diseconomies of scale .