Production theory

Production theory notes

More capital and less labour or more labour and less capital can be used to produce a fixed amount of output. Importance of the Law: The law of variable proportions carries economic significance. In the Long-Run, all factors of production are variable, while in the very long-run all factors of production are variable and research and development is possible. The Long-Run: On the other hand the long- run is defined as the period over which all factors of production can be varied, within the confines of existing technology. In other words, if the firm wishes to vary its production in the short-run, it can do so only by changing the quantity of labour. Thus, if in the short run it is not possible to increase the usage of all factors, there will be a change in the factor proportion. As, in subsequent stages of the production process, he moves beyond it, MP and AP both fall because diminishing returns set in.

Any further growth in the size of the firm yields decreasing returns to scale because output increases less than proportionately. If the factory increases its machinery and other equipment, along with labour and raw materials, this situation will not arise and returns may increase more in proportion, Equipment and machinery can only be increased in the long run.

In this context we may note that MP can be zero or negative, but AP can never be so.

assignment on theory of production

Determinants of Returns to Scale: There are two major determinants of increasing returns to scale: 1 indivisibilities and 2 the principle of increased dimensions. It may be noted, at the outset, that short-run output changes reflect changes in the proportions in which factors are combined.

If there are two workers, the second worker can do the same work as the first, and the output will be 2x units. For instance, a profit- maximising firm might double the usage of both labour and capital.

theory of production function

As the producer moves towards the best combination, MP and AP tend to rise. In this case, however, we would no longer be considering the application of varying quantities of one factor together with a fixed factor land.

theory of production wikipedia
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Microeconomics: Production Theory