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SHORT RUN production function

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SHORT RUN production function

presentation on short run production function and law of variable proportion

presentation on short run production function and law of variable proportion

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SHORT RUN production function

1. 1. SHORT RUN PRODUCTION FUNCTION Submitted to: BHOOMI SITLANI
2. 2. TABLE OF CONTENTS • What is short run in Economics? • Production function • Production function in short run • Law of Variable proportions. • Explantion of the Law
3. 3. What is short run in Economics? The short run is a term often used in economics, it describes a future period during which one input is fixed while others are variable. The variation in the inputs is owing to the fact that the time available is not enough for all inputs to be changed, hence, some inputs are fixed while others are changed. When used in economics, the short run reflects the behavior of an economy which is dependent on the time available for it to change or react to certain inputs. In the short run, both fixed costs and variable costs and inputs are available to economies, firms and industries. This term is directly connected to the firm being studied and bot a particular time.
4. 4. PRODUCTION FUNCTION • The production function is a mathematical equation determining the relationship between the factors and quantity of input for production and the number of goods it produces most efficiently. It answers the queries related to marginal productivity, level of production, and cheapest mode of production of goods. • Four major factors of production are – entrepreneurship, labor, land, and capital. They form an integral part of inputs in this function. The production function helps the producers determine the maximum output that firms and businesses can achieve using the above four factors. In addition, it aids in selecting the minimum input combination for maximum output production at a certain price point.
5. 5. Production function in short run  Short-run production is the process of utilizing one or more inputs to produce output over a period of time where at least one input is fixed. Companies usually have several input factors that they use to produce their output. These input factors can include things such as land, labor, capital, and raw materials. Typically, the main inputs in short-run production are capital and labor. Some input factors are considered to be fixed inputs, which means they do not change during production.  Meanwhile, other inputs are variable inputs that can be changed. For example, large machines and buildings are usually considered fixed inputs, while the number of workers hired is usually considered a variable input. Within the context of short-run production, at least one of the inputs must be fixed while the other inputs are variable. Short-run production can be related to a company's current contracts, a production that a company can complete given certain variable inputs, or a company can do without capital upgrades to its fixed inputs, such as factories.  The main goal of short-run production is to produce the most output possible given the inputs available. To do this, companies must optimize their use of both fixed and variable inputs. This often requires adjusting the variable inputs while the fixed inputs remain constant. For example, a company might increase the number of workers they hire while keeping the number of machines constant.  Input refers to the various resources that a company uses to produce its output. These resources include labor, capital, land, buildings, machines, and raw materials. Fixed input examples would be land or buildings, while variable input examples would typically be labor or the number of raw materials used. The amount of output a company can produce is determined by the quantity and quality of the inputs used. In other words, the inputs that a company uses will determine the output that can be produced.
6. 6.  The input factors also play a role in the short-run production curve. The short-run production curve is a graphical representation of the relationship between inputs and outputs in the short run. Input is usually represented as the x-axis on a short-run production curve. If the labor is the only variable input, the short-run production curve will show how the output changes as the number of labor changes. Typically, the relationship between input and output will produce a shape that begins at the origin and slopes upward to the right. This is because, in the short run, most companies will experience increasing returns to scale.  Output also plays a role in the short-run production curve as it is the other variable that determines the shape of the curve. The output is typically shown on the y-axis while the input is shown on the x-axis. If there is an increase in output, the curve will shift upward. If the output is decreased, the curve will shift downward. For example, if a company is able to produce a large amount of output with relatively few inputs, then the curve will be steep. However, the curve will be shallow if it produces a small amount of output with many inputs. SHORT RUN CURVE
7. 7. LAW OF VARIABLE PROPORTION  The law of variable proportions states that as the quantity of one factor is increased, keeping the other factors fixed, the marginal product of that factor will eventually decline. This means that up to the use of a certain amount of variable factor, marginal product of the factor may increase and after a certain stage it starts diminishing. When the variable factor becomes relatively abundant, the marginal product may become negative.  The law of diminishing returns does not cause a decrease in overall production capabilities, rather it defines a point on a production curve whereby producing an additional unit of output will result in a loss and is known as negative returns. Under diminishing returns, output remains positive, however productivity and efficiency decrease.  The law of diminishing returns is a fundamental principle of both micro and macro economics and it plays a central role in production theory.
8. 8. Explanation of the Law: The law of variable proportion is illustrated in the following table and figure. Suppose there is a given amount of land in which more and more labour (variable factor) is used to produce wheat.
9. 9. Three Stages of the Law of Variable Proportions:  These stages are illustrated in the following figure where labour is measured on the X-axis and output on the Y-axis.  Stage 1. Stage of Increasing Returns: In this stage, total product increases at an increasing rate up to a point. This is because the efficiency of the fixed factors increases as additional units of the variable factors are added to it. In the figure, from the origin to the point F, slope of the total product curve TP is increasing i.e. the curve TP is concave upwards up to the point F, which means that the marginal product MP of labour rises. The point F where the total product stops increasing at an increasing rate and starts increasing at a diminishing rate is called the point of inflection. Corresponding vertically to this point of inflection marginal product of labour is maximum, after which it diminishes. This stage is called the stage of increasing returns because the average product of the variable factor increases throughout this stage. This stage ends at the point where the average product curve reaches its highest point.  Stage 2. Stage of Diminishing Returns: In this stage, total product continues to increase but at a diminishing rate until it reaches its maximum point H where the second stage ends. In this stage both the marginal product and average product of labour are diminishing but are positive. This is because the fixed factor becomes inadequate relative to the quantity of the variable factor. At the end of the second stage, i.e., at point M marginal product of labour is zero which corresponds to the maximum point H of the total product curve TP. This stage is important because the firm will seek to produce in this range.  Stage 3. Stage of Negative Returns: In stage 3, total product declines and therefore the TP curve slopes downward. As a result, marginal product of labour is negative and the MP curve falls below the X-axis. In this stage the variable factor (labour) is too much relative to the fixed factor.
10. 10. Causes of Applicability Causes of increasing returns to a factor : 1.Fuller utilization of the fixed factor : In the initial Stages fixed factor remains under utilized. Its fuller utilization cause for greater application of the variable factor. Hence initially additional units of the variable factor add more & more to total output . 2. Increased efficiency of the variable factor : Additional application of the variable factor causes process based division of labour that raises efficiency of the factor. Accordingly MP of the factor tends to Rise. Causes of decreasing return to a factor : 1. Fixity of the factor: as more & more units the variable factor continue to be combined with the fixed factor , the latter gets over utilized. Hence the diminishing returns. 2. Imperfect factor substitutability: factors of production are imperfect substitutes of each other. more & more of labour cannot be continuously used in place of additional capital.
11. 11. THANKYOU SUBMITTED BY: SANSKRITI SEN MCOM (AFC) I SEM