Production An entrepreneur must put together resources -- land, labour, capital -- and produce a product people will be willing and able to purchase 2

Factors of Production Land - natural resources available for production - renewable resources: those that replenish - non-renewable resources: cannot be replaced Labor - physical and mental effort of people used in production Capital - all non-natural (manufactured) resources that are used in the creation and production of other products Enterprise (Entrepreneurship) - refers to the management, organization and planning of the other three factors of production

Payments to factors of Production Interest Factors of Production Land Labor Capital Enterprise Rent Wages Interest Profit INCOME

PRODUCTION FUNCTION THE RELATIONSHIP BETWEEN THE AMOUNT OF INPUT REQUIRED AND THE AMOUNT OF OUTPUT THAT CAN BE OBTAINED IS CALLED THE PRODUCTION FUNCTION

Production function describes the relationship between inputs and output © Pilot Publishing Company Ltd. 2005

Production Function   Short Run Production Function In this type of production function some factors or inputs are fixed i.e. thatcan be fixed proportion production function Y=f (x1 x2 --------- xn) Here, x1= Variable (x2 --------- xn)= Fixed inputs Long Run Production Function Where all inputs used are variables, it can be termed as variable proportion production functions. (x1 x2 --------- xn)= All inputs are variable.

Assumption of Production Function Considering a particular period. Technological state of knowledge will be unchanged. At that time, the farm will adopt the best one of the available production Technologies. The outputs are divisible in different units.  

Concept of Total Product (TP), Average Product (AP), And Marginal Product (MP) The output earned through the return of variable inputs and fixed inputs is called total product. The output earn from all units of factors at production is called Total Product.  Average Product (AP) Average Product is the result of total product divided by total inputs. Average Product (AP) = Total Product (TP) / Total Inputs Marginal Product (MP) The extra output earned by using extra unit of variable input, is called Marginal Product.

Stages of Production Stage 1 The total product increases at decreasing rate. The elasticity of product is greater than one (ep>1). MP is greater than average product (MP>AP). In stage one, MP=Maximum It is irrational zone of production.

Stage 2 The diminishing rate of increasing total product (TP) is continuing. Here, AP and MP decreased, but AP lies over MP. As MP< AP and AP is positive, so elasticity of product, ep= O 1.   At the border Stage 2, MP touches the X-axis, therefore MP=0. Stage 2 is up to MP=0, where TP is maximum. It is rational zone because MP is diminishing condition and MR (Marginal Return) = MC (Marginal Cost).

Stage 3 TP is maximum but diminishing. AP is positive and AP>MP. MP is negative. ep is less than Zero (ep< 0). Irrational zone of production because MP< 0.  

Zone of Rational Action Rational zone of production is that zone where every rational producer conducts his production. Here, the producer allocates his recourses in such a way that, profit maximization is possible in only that zone. A rational producer uses his inputs in the rational zone, so that MFC (Marginal Factor Cost) = MVP (Marginal Value Product. The stage 2 starts from the point, where APP (Average Physical Product) is Maximum and it ends with TPP (Total Physical Product is maximum). In this stage, TPP increases but APP diminishes and MPP decreases to zero.