Production

 Production: 

The consequence of the cooperation of the four factors of production—land, labor, capital, and organization is production.

Production can be summed up as "any activity, physical or mental, geared at satisfying the needs of others through the exchange." Hicks, J.R The producer's goal is to increase revenue as much as possible. By using the equity-marginal returns and substitution principles, the producer achieves the best combination. The equi-marginal returns concept states that any producer may only have maximum production when the marginal returns of all the production factors are equal to one another. For instance, production increases to its maximum when the marginal product of the land is equal to the marginal products of labor, capital, and organization.

The functional relationship between the quantity of a good produced (output) and production factors is what is meant by the term "production function" (inputs).

The relationship between a firm's physical production (output) and the material factors of production (inputs) is described as the production function. 

Professor Watson In mathematics, Q = f. ( L, K, R, Ld, T, t, M)

where

Q = Product R = Raw Material

L stands for labor, Ld for land, K for capital, and T for technology. A = Administration Let's limit the number of inputs for our current analysis to two: capital (K) and labor (L):

Q = f (L, K)

Sorts of Production:

Short-run production Function:

A short run is a time stretch that is excessively short to change all elements of creation.

Momentary creation capability is characterized as a utilitarian connection between factor information and results where a few elements are thought to be constant(say capital K ) and a few elements are expected factors( say work L). Emblematically,

Q = f ( L, K¯)

The bar over the variable k means fixed for the short run. In the short run, firms don't utilize extra fixed factors. The Law of variable proportion(diminishing return) is utilized in the short run.

Long-run Production Function:

Long-run production function: Long run refers to a period of time that is long enough to allow the firms to change the quantities of all resources. The long-term production function is defined as a functional relationship between factor input and output where all the factors of production are variables. 

 Q = f ( L, K)

 In long-run production, the firm expands its branch, machinery, etc. production theory viz. return to scale is used.

Price Factoring

The pricing of production factors, such as land, labor, capital, and organizations, is known as factor pricing. Rent, wage, interest, and profit, in that order, are the costs associated with these production variables. We study the various theories pertaining to the calculation of these factor prices in factor pricing.

Total Product (TP): 

The total quantities of an output produced by a firm or industry using different input units (ceteris paribus) over a period of time are called total product. Total production refers to the sum of marginal product.

TP =  Summation MP

where,

TP = total production

MP = marginal product

Average production (AP):

The average production of a factor is obtained by dividing the total production, by the number of inputs used in production or it is the per unit output produced by factors used.

TP = AP x L

TP = AP x C

Where,
AP_L = average product of labor
AP_C = average product of capital
TP = total product
L = no. of labor
C = capital

Marginal production (MP):

Marginal production of an input is the change in TP due to a change in an additional unit of input in production. Mathematically,

Where,

MPL = marginal product of labor

∆TP = change in total product

∆L = change in no. of labor

Alternatively,

MPL = TPn – TPn-1

Variable Proportions Law (Diminishing Returns)

This law has to do with how short-run production works. If we want to change the result in the near term, we can only change the variable factors; the fixed factors cannot be changed.

According to this law, if we increase the quantity of labor while maintaining the amount of fixed input (capital), the total product will initially increase at an increasing pace, then increase at a declining rate, reach its maximum level, and finally, start to decline.

Mathematically

Q = f (L, K¯)

Q = Output, where

L stands for labor.

Fixed capital is K.

"In a given state of technology, a rise in some inputs relative to other constant inputs will cause output to increase, but after a point, the extra output coming from the same additional inputs will be added less frequently. "Samuelson"

Assumptions of the law of variable proportion:

• Constant technology: State of technology changes the marginal and average productivity of variables may rise instead of diminishing.
• Short run: Under this law,  labor is variable and capital is fixed. This means that the law will be complied with in a short period of time.
• Homogeneous product: This means that all units of variable inputs are identical. For example, labor is a variable input and all workers involved in production have equal skills.

Three Stages of the Law

Stage I (Increasing return)– The TP increases at an increasing rate, and MP increases too. The MP increases within the units of the variable factor. Therefore, also called the stage of increasing returns. From the figure we can say that stage I starts from the origin and ends when AP = MP( meeting point).

Causes returns in the first stage:

Increase in efficiency of fixed factor.

Increase in efficiency of the variable factor.

Stage II (Decreasing returns) – The TP continues but at a diminishing rate. However, is positive. Further, the MP decreases with the number of units of the variable factor. Hence, called the stage of diminishing returns. From the figure, we can say that it starts from the cutting point of AP and MP and ends at MP = 0.

Causes of decreasing returns in the second stage:

Scarcity of fixed factors.

Overstaffing reduces productivity.

There will be a lack of specialized labor in the market.

Stage III (Negative returns) – Now, the TP starts declining, MP decreases, and becomes negative. Therefore, called the stage negative returns.

Overload for management in stage three.

Stages of Operation of the firm:

Stage I

The marginal product will increase with a rise within the variable issue.

Therefore, the producer will use a lot of units of the variable to expeditiously utilize the fastened factors. Hence, the producer would favor not stopping in Stage I however can attempt to expand additional.

Stage III

Producers don't wish to operate in Stage III either. during this stage, there's a decline in total product and also the marginal product becomes negative.

In order to extend the output, producers cut back on the number of variable issues. However, in Stage III, s/he suffers higher prices and additionally gets lesser revenue thereby obtaining reduced profits.

Stage II

Any rational producer avoids the primary furthermore and third stages of production. Therefore, producers like Stage II – the stage of decreasing returns. This stage is the most relevant stage of operation for a producer consistent with the law of variable proportions.

Use of the law of diminishing return

1. Role of nature:

Nature assumes an essential part than a man in farming. Regular variables like precipitation, avalanche, daylight, and so on are dubious so minimal efficiency off work and capital begins to fall after a specific point.

2. Land as a fixed factor:

In an economy the stockpile of land is fixed so creation can be changed exclusively by changing the extent of work and capital corresponding to land. Because of the abundance weight of these variables, the minimum efficiency of land begins to decline.

3. Less extent of division of work:

There is a restricted extent of division of work in farming areas than in modern areas. The insufficient extent of work means low efficiency. As extra units of work capital are applied with next to no expansion of the division of work welcomes the law of reducing the return to scale.

4.Less oversight:

Developed regions are spread all over. Practicing sufficient supervision is actually undeniably challenging. It causes consistent losses.

5. Less utilization of machines:

There is less chance to involve machines in agribusiness in contrast with industry. Because of lacking utilization of machines in horticulture, the yield will in general decrease.

6. Differences in the richness of land:

A few grounds are more rich and sore are less fruitful. As the interest for farming results increments, less and less rich land additionally goes under development. It additionally prompts reduced return.

Law of return to scale

The law of return scale is the long-run idea of the creation hypothesis. Over the long haul, every one of the variables of creation is inconsistent. Thus, this regulation makes sense of the pace of progress in yield due to a similar proportionate change in input for example labor and capital. Producers have a sufficient time period to manage all the factors which were fixed in the short run.

The law is concerned with the question of how output responds to the change in all inputs together. Suppose that all inputs ware the world would output be e the world or not this law price to confirm a return to scale if both inputs are to be varied in a fix proportion then the possible outcome will be of three types. They are:

Increasing return to scale

The constant return to scale 

Diminishing return to scale

The supposition of Laws of Return to Scale

All elements of creation are factors

No adjustment of creation instruments and methods

In light of long-run creation capability

Ideal contest in the market

Homogeneous variables input

Increasing return to scale (IRS)

 If all data sources are multiplied then all the results will be expanded over two times.

Causes:

Division of work

Specialization in administration and machine

The legitimate use of assets

Constant  Returns to Scale:

At the point when all information sources are expanded by a specific rate, the result increments by a similar rate, and the creation capability is said to show consistent re-visitations of scale.

For instance, on the off chance that a firm copies inputs, it duplicates the result.

It happens because of the indivisibility of fixed factors.

Diminishing return  to Scale:

The term 'consistent losses' to scale alludes to scale that result expansions in to a more modest extent than the expansion in all data sources.

For instance, on the off chance that a firm increments input by twofold yet the result increments by not exactly twofold, the firm is said to display diminishing re-visitations of scale.

Causes: Difficulty in coordination and the board

  Specialized diseconomies

   Exhaustibility of assets

Let's summarize the return to scale with an example.

Conclusion: 

In increasing return to scale marginal product(change in the product) will be rising with the increase in input. It will remain constant under constant return to scale and decline in case of decreasing return to scale.

Return to scale by means of isoquant

 the concept of return to scale can be illustrated by means of isoquants. before explaining the three laws of returns to scale let's first know about the isoquant

 Meaning of isoquants

 An isoquant is a curve that shows various communication of two inputs that represents the same level of output. scenes the level of output remains the same throughout the curve, it is also called the equal product curve.

 in the given figure each of the factor combinations a b c d and e produce the same level of output of 100 units although the number of labor and capital varies as shown in the table.

Factor Combination	Labor L	Capital K	Output(Units)
a	1	12	100
b	2	8	100
c	3	5	100
d	4	3	100
e	5	2	100

 The graph of isoquant shows Is communication producers equal quantities. here labor is cloth on the x-axis and capital on the y-axis.

 Characteristics of isoquants are listed below.

Isoquants are downward-sloping.

 Convex to the origin

 Non-intersecting.

 Higher isoquant gives a higher level of output and vice versa

 and do not touch the axis because production is not possible with single variable/input.

The laws of returns to scale

The law of returns scale describes the longer-term production phenomenon. It is also known as the long-run production function in which all factors of production are variable. producers have sufficient time to adjust all factors of production which were fixed in the short run.

Q = f(L, K) where Q is output and L, and K are factors of production.

Assumptions

There is no change in technology in the production

   Homogeneity  of  the factor of production

 Long time period

  No change in business structure

Increasing Return to scale:

The increasing return to scale means that the percentage increase in output is more than the percentage increase in all inputs.   If the quantity of both inputs K  and L are doubled then output is more than double. 

Causes of increasing return to scale

 Indivisibility of factors

 some factors like machines labor cannot be split into having.

 A higher degree of specialization in labor and machinery increases productivity.

 Managerial economics helps the inefficiency of managers in product marketing and finance.

The constant return to scale:

 If there is an equal percentage change in info and output then production is scale known as constant return to scale. 

 If quantities of labor and capital are doubled then output is also doubled in constant return to scale. It is also said to be a constant cost.

Decreasing return to scale:

 If output changes by less than the proportionate change in input then the production scale is known as decreasing returns to scale. Here, a one percent increase in input leads to less than a 1% increase in output. The distance of successive isoquant on the product line with the increase in scale.

Causes of decreasing returns to scale

It arises if there is a problem in proper management.

Lack of proper coordination bureaucracy, the lengthy channel of communication between the top management man on the production line.

Entrepreneurs cannot control individuals which creates a problem with the understandability and skills of production men.

 There may be a lack of natural resources which domain is the return to scale.