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Production theory deals with input output relationship. Input output relationship can be expressed in physical terms as well as in money terms. Production theory deals with physical relationship ( ie.) technical and technological relations between inputs and outputs.
(Eg) Capital labour ratios , capital output ratios etc.
One of the prime objective of business firm is to achieve optimum efficiency in production and minimizing cost for a given Production.
Meaning of production:
In economics the term Production means process by which a commodity are transformed into a different usable commodity.
Production also means transforming input into output. This kind of Production is called manufacturing.
In economic sense Production process may taken a variety of forms.
For eg. Transporting a commodity from one place to another where it can be used is Production.
Fisherman only transports fish to market place.
A coalseller is transporting coal from coalmines to market place.
Their activities too are production activity.
Input and output:
An 'input' is a good or service that is used in the process of production. Inputs are classified into Labour, Capital, Land, Raw materials and Time.
An 'Output' is any commodity which the firm produces for sale. An output is any good or service that comes out of production process.
Fixed and variable inputs:
Inputs are further classified as fixed input and variable inputs.
A fixed input is one whose quantity remains constant for a certain level of output.
Eg: plant, building, machinery etc.
A variable input is defined as one whose quantity changes with change in output.
Eg: labour, raw material.
Production function input output relationship:
The tool used to explain the input output relationship is production function.
* A production function between inputs and outputs in physical terms.
* It explains that Production of a commodity depends on the specific inputs.
* Production function may take the form of a schedule of table, a graphed line or curve, an algebraic equation or a mathematical model.
* Production functions have wide range of inputs such as land, labour, capital, raw material,time& space.
* A general emperial form of production function can be expressed as
Q= f( L,K,LB,M,T,t,e....)
Q- Quality, L- labour, K- capital, LB= Land/ building, M- Materials, T- Technology, t- time, e- managerial efficiency.
* The Economists have reduced the number of variables used in a production function only to viz, capital & labour.
The reason for ignoring the other inputs are as follows
* Land and Building as an input is constant for the economy as a whole and hence it does not enter into the aggregate production function.
* In case of individual firm and industries land/ building is lumped together with capital.
* In case of raw materials, it bears a constant relation to output at all level of production.
* Technology time and managerial are also assumed to be given in the short run.
Algebraically expression for production function:
Production function may be algebraically expressed as
Q= f(K,L)
Q = the quantity of output produced per time.
K = Capital
L = Labour.
Types of production function:
The firm would have two types of production function
a) short run production function (or) single variable production function.
b) long run production function.
Short term project function can be expressed as Q= f(L)
In the long run production function both K and L are included in the function.
Q= f(K,L)
Assumption for production function:
The production function are based on certain assumptions
1) Perfect divisibility of both inputs and outputs.
2) Limited substitution of one factor for another.
3) Constant technology.
4) Inelastic supply of fixed factors in the short run.
Managerial use of production function:
Managerial use of production function includes
1) It can be used to compute the least cost input combination for a given output or the maximum output input combination for a given cost.
2) Production function is useful in deciding on the value of employing a variable input factor in the production process.
3) Production function aid longrun decision making.
4) Production function is useful for decision makers to find out the most appropriate combination of input factors.
5) If returns to scale are increasing it will be worthwhile to increase Production through a proportionate increase in all factors of production.