CPT Chapter Theory of Production

With Bharat Galani.Duration:4hrs 10min

Notes

Theory of Production

Index
What is Production?
Factors of Production
Production Function
Law of Variable Proportions
Returns to Scale
Product optimisation
Economies & Diseconomies of scale

Factors of Production
Factors or Resources which makes production possible
Land
Labour
Capital
Entrepreneur

Land
Not limited to soil or earth surface but includes - all free gift of nature. water,air,natural vegetation etc.
Characteristic
Nature’s gift
Supply is fixed
Indestructible power
Passive Factor
Different uses

Labour
In economics, it is mental or physical exertion for reward and not for pleasure/love
Eg - work of maid vs work of housewife

Characteristic
Human effort
Perishable
Inseparable from Labourer
Power differs from labourer to labourer
All labour are not productive
Poor bargaining power
Choice hrs of labour vs hrs of leisure
Mobile

Capital
Part of wealth used for further production of wealth
capital vs wealth
capital stock concept vs income flow concept
produced means of production
man made instrument of production
Helps in further production

Types of capital

Fixed capital
Circulating capital
Real capital
Human capital
Tangible capital
Intangible capital
Individual capital
Social capital

Production function

States relationship between input & output.
max output min input
Output- form of volume of goods or service
Input- different factors of production
Given state of technology.
q=f(a,b,c,d…..n)
Long run vs Short run
Short run capital is fixed

Assumptions of Production function

Particular unit of time
technical knowledge is constant
factors of production are divisible into most viable units
producer using best technique available

Return to Scale

Study of production in long run
All the factors are increased together
Change in output due to change in scale
change in scale vs change in variable proportion
Constant return to scale (a+b=1)
Increasing return to scale (a+b>1)
Decreasing return to scale (a+b<1)

Law of Variable Proportion vs Return to Scale

Short run vs Long run
one factor of prod changed vs all factors of prod change
change in factor proportion vs change in scale

Isoquants

Similar to Indifference curves of theory of consumer behaviour
Combination of inputs giving same level of output.
Equal product or iso-product curves.
Producer is indifferent between them.
Production- indifference curve
IC not possible to quantify the level of satisfaction
IQ level of production can be identified

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