THE PRODUCTION CONCEPTS

1. THE PRODUCTION CONCEPTS

2. JOIN KHALID AZIZ • ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. • FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. • COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. • CONTACT: • 0322-3385752 • R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

3. SCALES OF PRODUCTION • It is the upper limit to the size of Production. • The size of the Plant, number of Plants Installed and the Technique of Production adopted by the Producer fixes the Scale of Production. • The Scale of Production are classified in followings • Small Scale of Production • Large Scale of Production • Optimum Scale of Production

4. ECONOMIES OF LARGE SCALE OF PRODUCTION • Internal Economies • Technical Economies • Managerial Economies • Commercial Economies • Financial Economies • Risk-Bearing Economies • External Economies • Economies of Information • Economies of Concentration • Economies of Disintegration

5. LAWS OF RETURNS • The Law of Variable Proportions • It refers to the behavior of output as the quantity of one input is increased while the other inputs are held constant. • It states that as successive units of a variable resource say labor are added to a fixed resource say land, so beyond some point the extra or marginal product will decline. • Till Marshall’s time this law was considered as the three different laws i.e. Law of Diminishing Return, Law of Increasing Return and Law of Constant Return. • But thereafter, these laws were considered as three different stages of one law which is called as Law of Variable Proportion.

6. ASSUMPTIONS OF THE LAW OF VARIABLE PROPORTION • Short Run • Constant Technology • Homogeneous Factors Basic Concepts of the Law • Total Product (TP) • Marginal Product (MP) • Average Product (AP)

7. LAW OF VARIABLE PROPORTION Increasing Marginal Return Diminishing Marginal Return Negative Marginal Return

8. LAW OF VARIABLE PROPORTION TP Stage 2 Stage 3 Stage 1 Output AP 0 MP No of Workers

9. LAW OF VARIABLE PROPORTION • Stage 1:Increasing Returns, TP increases at increasing rate, MP increases at decreasing rate, decreases and is greater than AP, AP goes to the maximum point. • Stage 2:Diminishing Returns, TP increases at decreasing rate and reaches maximum point, MP goes on diminishing, reaches to zero and is less than AP, AP starts decreasing. • Stage 3:Negative returns, TP starts decreasing, MP goes to negative and AP goes on decreasing but greater than MP.

10. RETURNS TO SCALE • The laws of Returns to Scale study the behavior of production when all the productive factors or inputs are increased or decreased simultaneously in the same ratio. • We analyze here the effect of doubling, trebling and so on of all the inputs of productive resources on the output of the product. • It has also three distinct stages • Increasing Returns to Scale • Constant Returns to Scale • Diminishing Returns to Scale

11. RETURNS TO SCALE Increasing Returns Constant Returns Diminishing Returns

12. RETURNS TO SCALE 5 Stage 2 4 Stage 1 Stage 3 3 MP 2 1 0 1 10 2 3 4 5 6 7 8 9 Scale

13. ISOQUANTS OR EQUAL PRODUCT CURVES • It means equal quantity produced. It shows various combinations of two inputs say Labor and Capital giving the same level of output.

14. PROPERTIES OF ISO-PRODUCT CURVES • Slopes Downward from left to right • The higher Isoquant show higher output • Non-intersecting • Convex to the origin because of the Marginal Rate of Technical Substitution MRTSxy = Change in X = MPx Change in Y MPy

15. ISOCOST CURVES • They are also called as Outlay Lines, Price Lines or Factor Cost Lines. • Each Iso-cost shows different combinations of two inputs that a firm can buy for a given sum of money at the given prices.

16. ISOCOST CURVES • Suppose a firm has Rs.400 to spend on the combination of two factors for producing a level of output. So it will have the following Isocost curve. A 10 B 8 C Factor Y Rs.40 per unit 6 D 4 E 2 F 0 1 2 3 4 5 Factor X Rs.80 per unit

17. PRODUCER’S EQUILIBRIUM • It is achieved when the Producer produce goods at lowest possible rates. • The Least Cost Factors Combination method is used to determine the Producer’s Equilibrium. • The Least Cost Factors Combination refers to the combination of factors with which a firm can produce a specific quantity of output at the lowest possible cost. • We take the Isoproduct curve and Isocost Line to determine the producer’s equilibrium under Least Cost Factors Combination method.

18. PRODUCER’S EQUILIBRIUM • Assumptions for the Producer’s Equilibrium • Two factors say X and Y are involved • Homogeneous units of both Factors • Prices of Factors are given and Constant • Total Outlay is given • Producer’s Equilibrium Conditions • The Isoquant curve must be Convex to the Origin • The Slope of the Isoquant Curve must be equal to the slope of Isocost Line. MRTSxy Y = Px X Py

19. PRODUCER’S EQUILIBRIUM A 10 Producer’ Equilibrium Point B 8 Factor Y C 6 IPiii D 4 IPii E 2 IPi F 0 1 2 3 4 5 Factor X

20. JOIN KHALID AZIZ • ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. • FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. • COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. • CONTACT: • 0322-3385752 • R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.