Chapter-Theory of Production, Cost and Revenue Micro Economics class 11 in english Medium CBSE Notes

Fixed factors and Variable factors :

Fixed factors - fixed foctors are those factor inputs whose quantity remains same. they do not vary with the volume of output. for e.g. land is a fixed factor and rent paid for land is a fixed cost.

Variable factors - Varible foctors are Those factors which change with a change in the level of output. for e.g. raw material, labour etc.  

Short Run and Long Run Production :

Short Run : Short run is that period (only one input is variable and all other inputs are assumed to be constant) where atleast one of the factors of production is fixed.

Long Run : It refers to that period where all factors of production become variable.

Production Functions :

• The functional relationship between input and output is known as production function.
• As per production function, output is a dependent variable and input is an independent variable.
• Production function states that production is a functional relationship between production and its various factors.

     Q_x = f (L,K,T ..... n)

Where,

    Q_n = output

    L = labour

    K = capital

    T = level of technology

    n = other inputs employed in production.

Assumptions of production funtion :

• The level of technology remains constant.
• The firm uses its input at maximum level of efficiency.
• It relates to particular unit of time.
• A change in any of the variable factors produces a corrosponding change in the level of output.
• The inputs are divisible into most viable units.

There are two types of production function :

(a) Short run production function.

(b) Long run production function.

Short Run Production function : In short run production function, the quantity of only one inputs varies. It occurs in the short run.

Long Run Production function : It occurs in the long run where a firm can change all factors of production.

Returns to factor (Law of variable Proportion) :

• Law of variable proportion states that ''as we increase more and more units of variable factors on a given fixed factors, output first increase at an increasing rate, then at a diminishing rate and finally declines".
• It occurs in the short run.
• This law is also known as "law of diminishing returns".
• Classical economists call this law as law of Diminishing returns whereas it is called as law of variable proportion by modern economist.

Assumptions of Law of variable Proportion :

• Technology remains constant.
• There are two factors of production one inputs factor is variable and other factor is kept constant.
• All units of variable factors are identical in size and quantity.
•  A particular production can be produced under varying production of the input combinations.
• Operates in short run.

Concepts of product :

Total product - It refers to the volume of goods and services produced during a specified period of time.

Average Product - It is the per unit production of variable factor. It is calculated by dividing total product with the number of units of variable factor:

   AP = TP/N

Marginal Product - Marginal product is the change in the total product resulting from an additional unit of variable factor. It can be expressed as follow:

   MP_n = TP_n - TP_n-1

Where,

 MP_n = marginal product of n^th unit

 TP_n = total product of n^th unit

 TP_n-1 = total product of previous unit

Reason for Returns:

1. Increasing Returns -

   (a) Fuller utilization of fixed factor.

   (b) Division of labour.

2. Diminishing Returns -

   (a) Disturbing the optimum proportion.

   (b) Imperfect substitutability of factors of production.

3. Negative Returns -

   (a) Over crowding.

   (b) Management problem.

Law of Returns to Scale:

• Returns to scale relates to the behaviour of total output as all inputs are varied in the same proportion.
• It is a long run concept, where all factors are variable.
• There are three types of returns to scale -

     (a) Increasing Returns to scale.

     (b) Constant Returns to scale.

     (c) Diminishing Returns to scale.

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