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Returns to Scale
1) Short Run : Some factor inputs are fixed while others are
variable. The production in short run can be increased only by
increasing. Quantity of variable factors.
CONEPTS OF PRODUCT
1) Total product / Total physical product :- It is defined
as the total quantity & services produced by a firm with
the given inputs during a specified period of time or total
product is sum total of output of each unit of variable
factor used in the process of production. Thus
TP = Sum of MPs
TP = AP X n
2) Marginal Product :- is a net addition to total product
when one more unit of variable factors employed
MP = TPn- TPn-1
MP = ∆TP
∆L
3) Average. product :- is the per unit production of the
variable factors i.e.
AP = TP
L
Fixed Variabl TP AP MP
Factor e TP TPn – TPn-1
(Land) Factor L
10 0 0 0 0
10 1 4 4 4
10 2 4 + 6 = 10 5 6 (10 - 4)
10 3 10 + 6 = 18 6 8 (18 -10)
10 4 18 + 6 = 24 6 6 (24 -18)
10 8 20 – 4 = 16 2 - 4(16 – 20)
Y
T
A
Total product
TP
Point of inflexion
O L1 L2 L3 Unit of labour
X
O L1 L2 L3 Units of labour X
MP
It states that as more & more units of a variable factor are applied to a given
quantity of a fixed factor the total product may increase at an increasing rate
initially but eventually it will increase at a diminishing rate.
Assumptions
1. The law applies only in the short run.
2. One factor of production is variable & others are fixed.
3. All units of variable factor are homogeneous.
4. State of technology is given & remains the same.
5. Factor proportions can he changed.
6.
Table of TP, AP, MP along with the graph showing 3 stages of Low of
variable proportion
(i) Overcrowding :- When more & more variable factors are added
to a given quantity of fixed factor it will lead to over crowding &
due to this MP of the Labours decreases & it goes into negative
Returns to Scale
It refers to a situation in which we study the behavior of output when all the
factor inputs are varied in the same proportion. It is applicable in the long
run.
In long period production of a commodity can be increased by increasing all
the factors in the same proportions. If all the factors increase in same
proportion the scale of production increases & the corresponding behavior of
output is studied as returns to scale.
There are 3 aspects of returns to scale
(i) Increasing returns to scale – occurs when a given percentage increase
in all factor inputs in the same ratio causes proportionately greater
increase in output
: Scale of production Output
1 Machine + 2 Laboures 100 Kgs
2 machine + 4 Laboures 250 Kgs
1. Meaning
2. Time period
3. Factor proportions
4. Scale of production
5. Stages
Questions :-
1. Explain the relationship between TP and MP, AP and MP, with the help
of diagram & schedule