THE PRODUCTION CONCEPTS

JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA- ECONOMICS, B.COM. ECONOMICS OF ICMAP, ICAP, MA- ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: CONTACT: R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN. R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

SCALES OF PRODUCTION It is the upper limit to the size of Production. It is the upper limit to the size of Production. The size of the Plant, number of Plants Installed and the Technique of Production adopted by the Producer fixes the Scale of Production. The size of the Plant, number of Plants Installed and the Technique of Production adopted by the Producer fixes the Scale of Production. The Scale of Production are classified in followings The Scale of Production are classified in followings 1.Small Scale of Production 2.Large Scale of Production 3.Optimum Scale of Production

Internal Economies Internal Economies Technical Economies Technical Economies Managerial Economies Managerial Economies Commercial Economies Commercial Economies Financial Economies Financial Economies Risk-Bearing Economies Risk-Bearing Economies External Economies External Economies Economies of Information Economies of Information Economies of Concentration Economies of Concentration Economies of Disintegration Economies of Disintegration ECONOMIES OF LARGE SCALE OF PRODUCTION

LAWS OF RETURNS The Law of Variable Proportions The Law of Variable Proportions It refers to the behavior of output as the quantity of one input is increased while the other inputs are held constant. It refers to the behavior of output as the quantity of one input is increased while the other inputs are held constant. It states that as successive units of a variable resource say labor are added to a fixed resource say land, so beyond some point the extra or marginal product will decline. It states that as successive units of a variable resource say labor are added to a fixed resource say land, so beyond some point the extra or marginal product will decline. Till Marshall’s time this law was considered as the three different laws i.e. Law of Diminishing Return, Law of Increasing Return and Law of Constant Return. Till Marshall’s time this law was considered as the three different laws i.e. Law of Diminishing Return, Law of Increasing Return and Law of Constant Return. But thereafter, these laws were considered as three different stages of one law which is called as Law of Variable Proportion. But thereafter, these laws were considered as three different stages of one law which is called as Law of Variable Proportion.

ASSUMPTIONS OF THE LAW OF VARIABLE PROPORTION Short Run Short Run Constant Technology Constant Technology Homogeneous Factors Homogeneous Factors Basic Concepts of the Law  Total Product (TP)  Marginal Product (MP)  Average Product (AP)

LAW OF VARIABLE PROPORTION Average Product Marginal Product Total Product No. of Workers Increasing Marginal Return Diminishing Marginal Return Negative Marginal Return

LAW OF VARIABLE PROPORTION Stage 1 0 No of Workers MP AP TP Stage 2 Stage 3 Output

Stage 1: Increasing Returns, TP increases at increasing rate, MP increases at decreasing rate, decreases and is greater than AP, AP goes to the maximum point. Stage 1: Increasing Returns, TP increases at increasing rate, MP increases at decreasing rate, decreases and is greater than AP, AP goes to the maximum point. Stage 2: Diminishing Returns, TP increases at decreasing rate and reaches maximum point, MP goes on diminishing, reaches to zero and is less than AP, AP starts decreasing. Stage 2: Diminishing Returns, TP increases at decreasing rate and reaches maximum point, MP goes on diminishing, reaches to zero and is less than AP, AP starts decreasing. Stage 3: Negative returns, TP starts decreasing, MP goes to negative and AP goes on decreasing but greater than MP. Stage 3: Negative returns, TP starts decreasing, MP goes to negative and AP goes on decreasing but greater than MP. LAW OF VARIABLE PROPORTION

RETURNS TO SCALE The laws of Returns to Scale study the behavior of production when all the productive factors or inputs are increased or decreased simultaneously in the same ratio. The laws of Returns to Scale study the behavior of production when all the productive factors or inputs are increased or decreased simultaneously in the same ratio. We analyze here the effect of doubling, trebling and so on of all the inputs of productive resources on the output of the product. We analyze here the effect of doubling, trebling and so on of all the inputs of productive resources on the output of the product. It has also three distinct stages It has also three distinct stages Increasing Returns to Scale Increasing Returns to Scale Constant Returns to Scale Constant Returns to Scale Diminishing Returns to Scale Diminishing Returns to Scale

RETURNS TO SCALE Marginal Returns Total Returns Scale of Production S.No Worker+3 Acres of land workers+6 Acres of land Increasing Returns Constant Returns Diminishing Returns

RETURNS TO SCALE MP Scale Stage 1 Stage 2 Stage 3

ISOQUANTS OR EQUAL PRODUCT CURVES It means equal quantity produced. It shows various combinations of two inputs say Labor and Capital giving the same level of output. It means equal quantity produced. It shows various combinations of two inputs say Labor and Capital giving the same level of output. DMRTS xy Total Output Factor Y Factor X Combinatio ns 100 units 121A 4:1 82B 3:1 53C 2:1 34D 1:1 25E

PROPERTIES OF ISO-PRODUCT CURVES Slopes Downward from left to right Slopes Downward from left to right The higher Isoquant show higher output The higher Isoquant show higher output Non-intersecting Non-intersecting Convex to the origin because of the Marginal Rate of Technical Substitution Convex to the origin because of the Marginal Rate of Technical Substitution MRTSxy =Change in X =MPx Change in YMPy

They are also called as Outlay Lines, Price Lines or Factor Cost Lines. They are also called as Outlay Lines, Price Lines or Factor Cost Lines. Each Iso-cost shows different combinations of two inputs that a firm can buy for a given sum of money at the given prices. Each Iso-cost shows different combinations of two inputs that a firm can buy for a given sum of money at the given prices. ISOCOST CURVES

Suppose a firm has Rs.400 to spend on the combination of two factors for producing a level of output. So it will have the following Isocost curve. Suppose a firm has Rs.400 to spend on the combination of two factors for producing a level of output. So it will have the following Isocost curve Factor Y Rs.40 per unit Factor X Rs.80 per unit A B C D E F ISOCOST CURVES

PRODUCER’S EQUILIBRIUM It is achieved when the Producer produce goods at lowest possible rates. It is achieved when the Producer produce goods at lowest possible rates. The Least Cost Factors Combination method is used to determine the Producer’s Equilibrium. The Least Cost Factors Combination method is used to determine the Producer’s Equilibrium. The Least Cost Factors Combination refers to the combination of factors with which a firm can produce a specific quantity of output at the lowest possible cost. The Least Cost Factors Combination refers to the combination of factors with which a firm can produce a specific quantity of output at the lowest possible cost. We take the Isoproduct curve and Isocost Line to determine the producer’s equilibrium under Least Cost Factors Combination method. We take the Isoproduct curve and Isocost Line to determine the producer’s equilibrium under Least Cost Factors Combination method.

Assumptions for the Producer’s Equilibrium Assumptions for the Producer’s Equilibrium Two factors say X and Y are involved Two factors say X and Y are involved Homogeneous units of both Factors Homogeneous units of both Factors Prices of Factors are given and Constant Prices of Factors are given and Constant Total Outlay is given Total Outlay is given Producer’s Equilibrium Conditions Producer’s Equilibrium Conditions The Isoquant curve must be Convex to the Origin The Isoquant curve must be Convex to the Origin The Slope of the Isoquant Curve must be equal to the slope of Isocost Line. The Slope of the Isoquant Curve must be equal to the slope of Isocost Line. MRTSxy Y =Px XPy XPy PRODUCER’S EQUILIBRIUM

Factor Y Factor X A B C D E F IPiii IPii IPi Producer’ Equilibrium Point

JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA- ECONOMICS, B.COM. ECONOMICS OF ICMAP, ICAP, MA- ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: CONTACT: R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN. R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.