BY DR.

LALITHA GOVINDAN
 Production is a function of four factors or
inputs.It is a transformation of physical inputs
into physical output.The functional
relationship between physical inputs and
physical output of a firm is known as
production.
 P=f(l,l,c,o)
 AP =TP/NO.OF UNITS OF FACTORS USED
 =Q/L
 Q-TOTAL PRODUCT
 L-NO.OF UNITS OF FACTORS USED
 MP=^Q/^L(^=DELTA)
 ASSUMPTIONS OF THE LAW
 TECHNOLOGY REMAINS THE SAME
 ONE FACTOR—VARIABLE
 THREE STAGES
 1.INCREASING RETURNS
 2.CONSTANT RETURNS
 3.DIMINISHING RETURNS

 PRODUCTION FUNCTION
 FIXED VARIABLE TOTAL P AVERAGE
MARGINAL
 FACTOR FACTOR PRODUCTION FUNCTION
PRODUCTION PRODUCTION
 LAND LABOUR
 5ACRES 1 10 10 10
; 2 22 11 12
; 3 36 12 14
; 4 52 13 16
; 5 66 13.2 14
; 6 76 12.6 10
; 7 80 11.4 4
; 8 82 10.2 2
; 9 82 9.2 0
" 10 78 7.8 -4
 Tp –increasing at an increasing rate
 MP— at its maximum
 AP---increasing
 Tp increases at a diminishing rate—at point F
 Point of inflection
 SECOND STAGE—UP TO POINT “ S” TP
INCREASES AT A DIMINSHING RATE
 MP AND AP ARE DECLINING BUT ARE POSITIVE
AT POINT “S”
 TP IS AT ITS MAXIMUM AND MP IS ZERO
 IT IS TOUCHING THE “X” AXIS
 THIRD STAGE---TP DECLINES AND SLOPES
DOWNWARDS.
 MP IS NEGATIVE AND IT LIES BELOW “ X” AXIS—
RETURNS ARE NEGATIVE
 PRODUCTION FUNCTION WITH TWO VARIABLE
INPUTS AND RETURNS TO SCALE.
 ISO –PRODUCT CURVES OR ISO– COST CURVES
ARE USED
 ISO—PRODUCT CURVES ARE CALLED EQUAL
PRODUCT CURVES
 INDIFFERENCE CURVES IN CONSUMPTION ARE
CALLED ISO –PRODUCT CURVES IN PRODUCTION
 ISO—COST CURVES ARE CALLED PRICE LINE OR
BUDGET LINE OR OPPORTUNITY LINE OR
INCOME LINE
 ISO—QUANTS
 CHARACTERISTIC FEATURES OF ISO—QUANTS
 IT SLOPES DOWNWARDS
 IT IS CONVEX TO THE ORIGIN
 IT WILL NOT INTERSECT WITH EACH OTHER
 HIGHER THE ISO-QUANT –HIGHER THE OUTPUT
 LOWER THE ISO-QUANT LOWER THE OUTPUT.
SLOPE OF THE ISO-QUANT—MARGINAL
RATE OF TECHNICAL SUBSTITUTION
DELTA “ Y”/ DELTA “X”
X AND Y ARE FACTORS OF PRODUCTION .
ALL THE POINTS ON THE ISO—QUANT WILL GIVE
SAME AMOUNT OF OUTPUT
HENCE IT IS CALLED ISO-QUANT
PRODUCER IS INDIFFERENT TO ALL THE POINTS
WHEN HE MOVES ON THE CURVE FROM LEFT TO
RIGHT OR DOWNWARDS,
FACTOR “X” IS SUBSTITUTED FOR FACTOR “Y”
LOSS IN FACTOR Y IS COMPENSATED BY GAIN IN
FACTOR X
SLOPE OF THE ISO—COST LINE—PRICE RATIOS OF
X AND Y i.e PX/PY
 EQUILIBRIUMOF THE PRODUCER
 ISO—QUANT --- TANGENT TO ISO-COST LINE

 AT POINT E
 E=POINT OF EQUILIBRIUM
 MRTS=PX/PY
SLOPE OF THE ISO-QUANT IS EQUAL TO
SLOPE OF THE PRICE LINE