Prouction

Question 1

What is production?

Answer 1

Production refers to the generation of output, with the help of factors of production.

Question 2

What is production function?

Answer 2

Production function refers to the technological (or functional) relationship between factors of input and output of a commodity.

Question 3

What is the difference between returns to factor and returns to scale?

Answer 3

1. Study - RTF studied with reference to “Variable Proportions” type production functions, RTS studied with reference to “Constant Proportions” type production functions.

2. Concept - RTF short-run concept, RTS long-run concept

3. Variability - RTF only one factor input is variable (labour), while others are fixed, RTS all factor inputs variable

4. Ratio - RTF ratio between fixed and variable factors varies, RTS ratio between fixed and variable factors is constant

5. Scale/Technique - RTF scale and technique of production remains constant, RTS scale and technique of production ought to change

Question 4

What is TP/TPP?

Answer 4

Total Product or Total Physical product refers to the total output produced with the help of factor inputs.

Question 5

What is MP/MPP?

Answer 5

Marginal Product or Marginal Physical product refers to the change in total output due to application of additional unit of variable input (labour).

MP = #TP/#Labour

Question 6

What is AP/APP?

Answer 6

Average Product or Average Physical product refers to per unit productivity of the variable input (labour).

AP = TP/Labour

Question 7

What is returns to factors?

Answer 7

Returns to factors refers to a situation in which the total output tends to change when more and more of the variable factors are combined with the fixed factors of production. It has three stages:-

1. Increasing Returns to Factors
2. Constant Returns to Factors
3. Diminishing Returns to Factors

Question 8

Explain increasing returns to factors

Answer 8

Refers to a situation in which the total output tends to increase at an increasing rate when more and more of the variable factors are combined with the fixed factors of production.

Its causes are:-

• Fuller utilisation of fixed factor
• More than efficient utilisation of variable input
• Better co-ordination between factors
• Better than perfect factor subsitution

Question 9

Explain constant returns to factors

Answer 9

Refers to a situation in which the total output tends to increase at a constant rate when more and more of the variable factors are combined with the fixed factors of production.

Its causes are:-

• Optimum utilisation of fixed factor
• Efficient utilisation of variable input
• Ideal co-ordination between factors
• Perfect factor subsitution

Question 10

Explain diminishing returns to factors

Answer 10

Refers to a situation in which the total output tends to increase at a decreasing rate when more and more of the variable factors are combined with the fixed factors of production.

Its causes are:-

• Over-utilisation of fixed factor
• Less efficient utilisation of variable input
• Poor co-ordination between factors
• Imperfect factor subsitution

Question 11

What is the law of variable proportion? What are its phases?

Answer 11

LVP states that as more and more units of variable factors are combined with the fixed factors of production, the total output initially increases at an increasing rate, than the total output increases at a diminishing rate, and after reaching the maximum point it begins to fall. It imples that marginal product in the initial phases increases and reaches maximum point, then it falls to 0 and finally becomes negative.

1. Phase I - Increasing Returns

• TP - Increases at an increasing rate
• MP - Increases and reaches maximum point
• AP - Increases

2. Phases I - Diminishing Returns

• TP - Increases at a decreasing rate and reaches maximum point
• MP - Decreases and falls to 0
• AP - Reaches maximum point and then begins to fall

3. Phase III - Negative Returns

• TP - Begins to decline
• MP - Becomes negative
• AP - Continues to diminish

NOTE: Write schedule, with MPP 3, 4, 5, 4, 3, 2, 1, 0, -1 and fill in TPP, APP, Units of Labour, Units of Land

Question 12

Explain the relataionship between TP and MP

Answer 12

1. When TP increases at an increasing rate, MP rises
2. When TP increases at a diminishing rate, MP falls
3. When TP is maximum, MP is 0
4. When TP falls, MP becomes negataive

Question 13

Explain the relationship between AP and MP

Answer 13

1. When MP is more than AP, AP rises (MP > AP, AP ^)
2. When MP is equal to AP, AP is maximum (MP = AP, AP max)
3. When MP is less than AP, AP falls (MP < AP, AP falls)

Question 14

Explain the types of returns to scale and thier causes

Answer 14