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108, , , , , , THEORY OF |, PRODUCTION, , 6.1 Concept of Production, , 6.2 Production Function, , , , , , , , , , , , , , , , , , 6.3 Isoquants, 6.4 Ridge Lines, 6.5 Least Cost Combination of Inputs, , 6.6 Expansion Path, , , , , , The theory of production is concerned with the problem of combining, various inputs to produce a certain level of output. It analyses the physical, relationship between inputs and outputs. It provides a base for analysin:, the relation between costs and output and, therefore, helps the firm to, determine its profit maximising output. It also provides a base to analyse, the demand for the factors of production and, therefore, helps to determine, the prices of the factors. Hence, the theory of production plays an important, , role in the theory of value., , The essence of production is the creation of utilities. A productive activity, may involve any of the following forms, namely; (i) increase in the quantity, of a good and service; (ii) change in the form of a good and service; ot, (iii) change in the spatial or temporal distribution of a good and service, In all the above cases production is said to have taken place if people prete!, the new quantity or the new form or the new distribution to the old.

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109, , Theory of Production 5 or resources, , The act of production involves the transformation of inc machinery,, into output. For example, Apple Company hires labour te products. The, technology and raw materials in factories to produce its Pa ater or an, output of a firm can be a final product like a personal co Ved ss he, intermediate product, such as semiconductors which are duction in, production of computers and other goods. The term Pe eion seaithig, economics is not confined to bringing about physical transforma S neatien, matter but also covers rendering of services. The services are “ e o, medicine, banking, communication, transportation and many others., , Inputs are the resources used in the production of goods and services. The, , inputs may be classified into labour, capital, land or natural resources, and entrepreneur. Inputs can also be classified as fixed and variable inputs., Fixed inputs are those which cannot be changed in the short period of time., They are the firms' plant and equipment. On the other hand, variable inputs, are those that can be changed and varied easily in the short period. They, are raw materials and less skilled labour., , , , Just as demand theory centers around the concept of demand function, the, theory of production revolves around the concept of production function., A production function can be an equation, table or graph showing the, maximum amount of a commodity that a firm can produce from a given, set of inputs during a period of time., , Inputs > Production Function > Output, , The concept of production function describes the ways in which the factors, of production are combined by a firm to produce different levels of output., More specifically, it shows the maximum volume of physical output, available froma given set of inputs, or the minimum set of inputs, necessary to produce any given level of output., , Production function expresses an engineering or technical relation,, because the relation between inputs and outputs is a technical one. The, production function is determined by a given state of technology. When, technology improves the production function of a product changes, because, the new production function can yield greater output from the given inputs, or smaller inputs will be enough to produce a given level of output. Further,, production function incorporates the idea of efficiency. Thus, production, function is not any relation between inputs and outputs, but a relation in, ‘which a given set of inputs produce a maximum output. Therefore, the

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110, , . Business Economics - I (BMS, BAF, BFM, BBL: SEM, production function includes :, , producing an output, all the technically efficient method, é, , A i ; . Pe, ae Te ea, according to Samuelson specifies the maximuy,, , trod i j i i ‘a, knowledge. Produced with a given state of engineering and technic,, , Example : Technically Efficient Method of Production, Let us suppose that comm, , odity X i d by two methods by us;, labour and capital: ty Xs produced By two yung, MethodA - Method B, Labour 3 4, Capital 4 4, , In the above example method B is inefficient to method A because method, Buses more of labour and same amount of capital as compared to method, , A. The profit maximising firm will not be interested in wasteful or inefficient, methods of production., , Ifmethod A uses less of one factor and more of the other factor as compared, with any other method C, then method A and C are not directly comparable, For example, let us suppose that a’commodity is produced by two methods:, , Method A Method C, Labour 3 2, Capital 4 5, , In the above example, both methods A and C are technically efficient and, are included in the production function, which one of them would be chosen, depends on the prices of factors. The choice of any particular technique, froma set of technically efficient techniques (or methods) is an economic, one, based on input prices, and not a technical one., , In a production function, the dependent variable is the output and the, independent variables are the inputs. Thus, the production function can, be expressed as, , Q=f(N,LKE,T) ,, , gt, ad, , BdTUED, , rie, , ewe dD, , ~

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Ss Aaah. * ., , T1d, Theory of Production, Where Q = Quantity produced, N = _ Natural resources, L = _ Labour, K = Capital, E = _ Entrepreneur or organiser, , T, , For simplicity, only the inputs of labour and capital are considered as, independent variables in a production function. Normally, land does not, enter the production function explicitly because of the implicit assumption, that land does not impose any restriction on production. However, labour, and capital enter production explicitly. A simple specification ofa, production function is, , Technology, , Q=F (LK), , where Q, as above, is the output, L and K are the quantities of inputs of, labour and capital and F shows the functional relation between the inputs, and output. Production function is based on an implicit assumption that, the state of technology is given and remains constant. This is because an, improvement in technical knowledge will lead to larger output from the, use of same quantity of inputs., , Uses of Production Function :, , The concept of production function has various application. It can be used, to compute the least-cost factor combination for a given output or the, maximum output combination for a given cost. A knowledge of production, function may be helpful in deciding on the value of employing a variable, factor in the production process. ., , , , The term isoquant is derived from two words, iso meaning equal and quant,, that is, quantity., , An isoquant shows all those combinations of factors which produce the, same level of output. An isoquant is also known as equal product curve or, iso-product curve.

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112, , Business Economi, Ss Omics - I (BMS, BAF, BEM, BBL: SEM., Types of Isoquants, , The isoquant, ma ., substitutatility of mete various shapes depending on the degree of, , 1. Linear Is ‘ 2 |, in Fig. 6 i Thee In this case, the isoquant would be straight lines a, |, production : S type assumes perfect substitutatility of factors o;, that is the rate s we labour and capital are perfect substitutes, , 7 € at which i ital j, production fice ee ich labour can be substituted for capital ip, , TS, ,) is constant. I, y |, A, s, a, Ss, oO, Q, x, oO Labour 8B, Fig. 6.1, , If an isoquant intercepts Y or X axis it would mean that a given, commodity may be produced by using only capital or only labour or, by an infinite combination of labour and capital. At point A on the, isoquant the level of output can be produced with capital alone (ie., without labour). Similarly, point B indicates that the same level of, output can be produced with labour alone (i.e. without any capital)., , This is unrealistic because capital and labour are not perfectly, substitutable., , 2. Right Angled Isoquant: This assumes zero substitutability of the, factors of production. There is only one method of producing any one, commodity, In this case, the isoquant takes the form of a right angle, as in Fig. 6.2. In this case, labour and capital are perfect complements, |, , that is, labour and capital must be used in fixed proportion shown by, point C. ,