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Theory of Production, Production Function, Assignment Help
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>> Theory of Production, Production Function
Theory of production Assignment Help
The production function is represents the actuality that output of a company relies on the inputs employed in the production process.
The Law of Diminishing Returns or the Law of Variable Proportion
According to the Law of Variable Proportions, if one factor of production like land or capital is augmented and the other factors are kept constant, then the marginal product of that particular factor will eventually decrease. In simple terms, up to a certain quantity of variable factor, marginal product of the factor may increase but after a particular stage it begins to decline and if the variable still increments in that case the marginal product can even turn out to be negative.
Fig. Law of Variable Proportion
Stage I –
In this stage the total product (TP) increases at an increasing rate and there is increase in average product. In the starting marginal product (MP) also increases but after a point it starts decreasing. AP (Average Product) continues to increase till MP is greater than the AP. When MP becomes equal to AP, the increase in AP is suspended.
Stage II –
In this stage the TP continues to increase but at diminishing rate. This stage goes to the point where TP reaches the maximum and MP becomes zero. The AP also declines in this stage but remains above MP.
Stage III –
In this stage TP starts decreasing and MP becomes negative. AP Continues to decrease but always remains above zero.
In simple terms, an isoquant is described as a contour line illustrated by means of points at which the equal amount of output is manufactured although altering the amounts of two or more inputs. Isoquants are usually made on capital-labor graphs, depicting the technical tradeoff among labor and capital involved in the production function, and the declining marginal proceeds of both inputs. Further, counting one input whereas keeping the other same ultimately result in decline of marginal output, and this is highlighted in the form of the isoquant.
A family of isoquants can be easily highlighted by an isoquant map, which is a graph uniting several isoquants, each depicting a distinct amount of output.
Fig. An Isoquant Map
Economies and Diseconomies of Scale
Economies of scale can be defined as the benefits that the producer obtains by escalating its extent of production.
In contrary to this, Internal and External diseconomies of scale implies the shortcomings associated with the company due to large scale of production.
Return to Scale
The relationship between the inputs and the output in the process of production is clearly explained by the Laws of Returns or the Law of Variable Proportions. This law examines the production function with only one factor variable, keeping the quantities of other factors constant. The laws of returns comprises of three phases:
• The Law of Increasing Returns
It refers to a situation where the increase in total output is more than the increase in units of factor inputs.
• The Law of Constant Returns
It refers to a situation where the increase in total output is equal to the increase in units of factor inputs
• The Law of Diminishing Returns
It refers to a situation where the increase in total output is less than the increase in units of factor inputs
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