Production : Production can be defined as the transformation of resources into products or the process whereby inputs are turned into outputs through technological innovations. The efficiency of this process depends upon 3 factors

• The proportion in which the various inputs are employed
• The absolute level of each input
• The productivity of each input at different input levels and ratios.

Factors of production: There are four factors of production – Land, Labour, Capital and Organization. Additionally, we can categorize the factors of production as variable inputs and fixed inputs.

Fixed inputs: A fixed input is defined as one whose quantity cannot be readily changed when market conditions indicate that an immediate change in output is desirable. Although no input is ever absolutely fixed but frequently for analytical simplicity we hold some inputs fixed.

Variable inputs: A variable input is the one whose quantity can be changed almost instantaneously in response to desired changes in output. Example can be labour hours.

Corresponding to fixed and variable inputs economists also introduced two other concepts on short and long run.

Short run: In a short run the quantities of one or more factors of production cannot be changed.

Long run : Long run production corresponds to the time that is needed to make all production inputs variable. Usually long run represents the scenario when firms decide to expand the scale of operations or branch out into new products.

Fixed vs Variable proportions : variable proportion production implies that output can be changed in the short run by changing the amount of variable inputs used in co-operation with the fixed inputs. Naturally as the amount of one input is changed the other remaining constant, the ratio of inputs changes too. Secondly, when production is subject to variable proportions, the same output can be produced by various combinations of inputs – i.e. by different input ratios. This may apply only to the long run but it is relevant to the short run when there is more than one variable input.

On the other hand, fixed proportions production means there is one and only ratio of inputs that can be used to produce a product. If output is expanded or contracted, all inputs must be expanded or contracted so as to maintain the fixed input ratio. Suppose while baking a cake we need 1 cup milk and 2 cups flour and so, we will need 2 cups of milk and 4 cups of flour to prepare 2 cakes.

Production Function: A production function is a mathematical equation showing the maximum amount of output that can be produced from any specified set of inputs given the existing technology. In other words, production functions describe what is technically feasible when the firm operates efficiently i.e. when the firm uses each combination of inputs as effectively as possible.

Q = f( L, K, N, O) where L is labour, K is capital, N is land and O is organization

Total Output/ Total Product: The short run production function gives the total (maximum) output obtainable from different amounts of the variable input given a specified amount of the fixed input. Total output can also graphically be described as the locus of different output levels produced by using different combinations of factor inputs. Output is plotted on the vertical axis and input is plotted on the horizontal axis. A total product curve first rises slowly, then more rapidly and finally reaches the maximum value and then begins to decrease. This curvature represents the law of diminishing marginal returns.

Average Product: Average product represents the quantity of output produced per unit of a particular input. For example, average product for labour will be –

Average product = Total Product / Amount of labour employed

The average product is given by the slope of the line drawn from the origin to the corresponding point on the total product curve.

Marginal Product: Marginal product represents the quantity of additional units of output produced by one additional unit of input. In other words, the marginal product of an input is the addition to total product attributable to the addition of one unit of the variable input, keeping the fixed inputs constant.

The marginal product at a point is given by the slope of the total product at that point. Marginal product is positive as long as output is increasing but becomes negative when output is decreasing.

Relation among Average product (AP), Marginal product (MP) and Total product (TP):

The relation among AP, MP and TP is shown below for variable input labour.

Law of diminishing marginal returns :

It states that as the amount of variable input is increased, the amount of fixed or other inputs held constant, a point is reached beyond which marginal product declines.

Production Stages :

From the above diagram it can be seen that when marginal product is greater than the average product, the average product is increasing. Similarly, when the marginal product is less than the average product, the average product is decreasing. The marginal product must equal the average product when the average product reaches its maximum. Out of the 3 stages shown in the above diagram, stage II is the most efficient production stage.