Economics · Chapter 11
Study notes aligned to the official NEB syllabus.
In the general sense, production means the creation of utility in anything, in the form of goods and services, to fulfil the consumer's needs. In economics, production is the process of transforming the factors of production into final goods and services that can fulfil consumption and investment demand. The theory of production consists of an analysis of how the entrepreneur combines various inputs to produce a stipulated output in an economically efficient manner within a given technology. It deals with the production process of goods and services.
The functional relationship between factor inputs and output is known as the production function. A general production function consists of several factors of production such as land, labour, capital, technology, management and time. The relationship between inputs and outputs is called the production function.
Symbolically,
$$Q = f(L, K, Tec, Ld, M, t, \dots)$$
Where,
a. Short-run production function: The term short-run is defined as a period of time over which some factors of production are fixed and some are variable. Factors such as plant and equipment, which cannot be changed in the short-run, are called fixed factors, while labour and raw materials, which can be varied, are called variable factors.
Symbolically,
$$Q = f(L, \bar{K})$$
Where $Q$ = quantity of output, $f$ = function, $L$ = units of labour and $\bar{K}$ = constant capital.
b. Long-run production function: The long-run production function is related to changing all the factors of production. The producer has sufficient time to manage all the resources. Therefore, all the factors of production are changeable in the long-run production function.
Symbolically,
$$Q = f(L, K)$$
Where $Q$ = quantity of output, $f$ = function, $L$ = units of labour and $K$ = units of capital.
i. Total Product (TP): The total output obtained by employing a certain amount of a factor, keeping all other factors constant, is called total product. The total product of a variable factor is defined as the total quantity of a commodity that a firm or an industry can produce from the application of given factors of production in a given time period. TP is the sum of marginal products:
$$ \begin{aligned} TP &= \sum MP \ &= MP_1 + MP_2 + MP_3 + \dots \end{aligned} $$
Where $TP$ = total product, $MP$ = marginal product and $\sum$ = sum.
ii. Average Product (AP): Per unit output of the variable factor is called average product. It is obtained by dividing the total product by the units of the variable factor employed by the firm in the process of production:
$$AP = \frac{TP}{L}$$
Where $AP$ = average product, $TP$ = total product and $L$ = units of labour.
iii. Marginal Product (MP): The additional unit of output produced by a firm by the utilization of an additional unit of variable factor input is known as marginal product. It can also be defined as the ratio between the change in TP and the change in variable input:
$$MP = \frac{\Delta TP}{\Delta L}$$
Where $MP$ = marginal product, $TP$ = total product, $\Delta$ = change and $L$ = units of labour.
In other words, marginal product is also obtained by subtracting the second-last quantity of total product from the last quantity of total product of a commodity:
$$MP = TP_n - TP_{n-1}$$
Where $TP_n$ = total product of the $n$th unit and $TP_{n-1}$ = total product of the $(n-1)$th unit.
As TP is the sum of MP, when the producer increases the units of labour, TP also increases. Average product (AP) is the ratio of total product (TP) to the units of labour. Similarly, marginal product (MP) is the additional product from using inputs. The derivation is shown in the following table.
Table 2.1: Derivation of Total Product (TP), Average Product (AP) and Marginal Product (MP)
| Units of labour | Total Product (TP) | Average Product (AP) | Marginal Product (MP) |
|---|---|---|---|
| 1 | 4 | 4 | 4 |
| 2 | 10 | 5 | 6 |
| 3 | 18 | 6 | 8 |
| 4 | 24 | 6 | 6 |
| 5 | 28 | 5.6 | 4 |
| 6 | 30 | 5 | 2 |
| 7 | 30 | 4.3 | 0 |
| 8 | 28 | 3.5 | -2 |
Diagram: TP, AP and MP curves against units of labour, showing TP rising then falling, and AP and MP rising to a peak then declining, with MP cutting the horizontal axis (Fig. 2.9, see textbook).
In the general sense, production means the creation of utility in anything, in the form of goods and services, to fulfil the consumer's needs. In economics, production is the process of transforming the factors of production into final goods and services that can fulfil consumption and investment demand. The theory of production consists of an analysis of how the entrepreneur combines various inputs to produce a stipulated output in an economically efficient manner within a given technology. It deals with the production process of goods and services.
The functional relationship between factor inputs and output is known as the production function. A general production function consists of several factors of production such as land, labour, capital, technology, management and time. The relationship between inputs and outputs is called the production function.
Symbolically,
Where,
a. Short-run production function: The term short-run is defined as a period of time over which some factors of production are fixed and some are variable. Factors such as plant and equipment, which cannot be changed in the short-run, are called fixed factors, while labour and raw materials, which can be varied, are called variable factors.
Symbolically,
Where = quantity of output, = function, = units of labour and = constant capital.
b. Long-run production function: The long-run production function is related to changing all the factors of production. The producer has sufficient time to manage all the resources. Therefore, all the factors of production are changeable in the long-run production function.
Symbolically,
Where = quantity of output, = function, = units of labour and = units of capital.
i. Total Product (TP): The total output obtained by employing a certain amount of a factor, keeping all other factors constant, is called total product. The total product of a variable factor is defined as the total quantity of a commodity that a firm or an industry can produce from the application of given factors of production in a given time period. TP is the sum of marginal products:
Where = total product, = marginal product and = sum.
ii. Average Product (AP): Per unit output of the variable factor is called average product. It is obtained by dividing the total product by the units of the variable factor employed by the firm in the process of production:
Where = average product, = total product and = units of labour.
iii. Marginal Product (MP): The additional unit of output produced by a firm by the utilization of an additional unit of variable factor input is known as marginal product. It can also be defined as the ratio between the change in TP and the change in variable input:
Where = marginal product, = total product, = change and = units of labour.
In other words, marginal product is also obtained by subtracting the second-last quantity of total product from the last quantity of total product of a commodity:
Where = total product of the th unit and = total product of the th unit.
As TP is the sum of MP, when the producer increases the units of labour, TP also increases. Average product (AP) is the ratio of total product (TP) to the units of labour. Similarly, marginal product (MP) is the additional product from using inputs. The derivation is shown in the following table.
Table 2.1: Derivation of Total Product (TP), Average Product (AP) and Marginal Product (MP)
| Units of labour | Total Product (TP) | Average Product (AP) | Marginal Product (MP) |
|---|---|---|---|
| 1 | 4 | 4 | 4 |
| 2 | 10 | 5 | 6 |
| 3 | 18 | 6 | 8 |
| 4 | 24 | 6 | 6 |
| 5 | 28 | 5.6 | 4 |
| 6 | 30 | 5 | 2 |
| 7 | 30 | 4.3 | 0 |
| 8 | 28 | 3.5 | -2 |
Diagram: TP, AP and MP curves against units of labour, showing TP rising then falling, and AP and MP rising to a peak then declining, with MP cutting the horizontal axis (Fig. 2.9, see textbook).