PRODUCTION

Question 1

What is Production

Answer 1

Production refers to transformation of inputs into outputs.

Question 2

Production Function

Answer 2

Production Function is an expression of the technological relation between physical inputs
and output of a good.

Question 3

Explain short run

Answer 3

 It refers to a period in which output can be changed by changing only variable factors.
 In short run, fixed inputs like plant, machinery, etc. cannot be changed.
 In short run, some factors are fixed and some are variable and fixed factors cannot be
changed during a short span of time

Question 4

2. Explain long run.

Answer 4

 It refers to a period in which output can be changed by changing all factors of production.
 It is long enough for the firm to adjust all its inputs according to change in the conditions in
the long run.
 In long run, firm can change its factory size, switch to new techniques of production etc.

Question 5

What is the difference between short run and long run

Answer 5

Meaning

Short Run refers to a period in which output can be changed by changing only variable factors.
Long Run refers to a period in which output can be changed by changing all factors of production.

Classification

Factors are classified as variable and fixed factor in the short run.
All the factors are variable in the long run.

Price Determination

In short run, demand is more active in price determination as supply cannot be increased
immediately with increase in demand.
In long run, both demand and supply play equal role in price determination as both can be increased.

Question 6

Variable Factors

Answer 6

 It refers to those factors, which can be changed in the short run.
 It varies directly with the level of output and is not required in case of zero output.
 For Example: raw material, casual labour, etc.

Question 7

Fixed Factors

Answer 7

 It refers to those factors, which cannot be changed in the short run.
 They do not vary directly with the level of output.
 For Example: plant, machinery, etc.

Question 8

different types of Production Function

Answer 8

Short Run Production Function (Variable Proportion Type)

Long Run Production Function (Constant Proportion Type)

Question 9

Short Run Production Function

Answer 9

(Variable Proportion Type):
 Short run production function refers to a situation when output is increased by changing only one input while keeping other inputs unchanged.
 As there is change in variable input only, the ratio between different inputs tends to change at different levels of output.

Question 10

Long Run Production Function

Answer 10

.(Constant Proportion Type):
 Long Run Production Function refers to a situation when output is increased by increasing all the inputs simultaneously and in the same proportion.
 As all inputs are variable in the long run, the ratio between different inputs tends to remain same at different levels of output.

Question 11

What do you mean by Product?

Answer 11

Product or output refers to the volume of goods produced by a firm or an industry
during a specified period of time.

Question 12

Types of product

Answer 12

Product can be of three types:

i. Total Product
ii. Marginal Product
iii. Average Product

Question 13

Total Product (TP):

Answer 13

 It refers to total quantity of goods produced by a firm during a given period of time with
given number of inputs.
 For Example: if 10 labours produce 60 kg of rice, then total product is 60 kg.
 It is also known as ‘Total Physical Product (TPP)’ or ‘Total Return’ or ‘Total Output’.

Question 14

Average Product (AP):

Answer 14

 It refers to output per unit of variable input.
 For Example: if TP is 60kg of rice, produced by 10 labours, then average product will be 6kg.
 It is also known as ‘Average Physical Product (APP)’ or ‘Average Return’.
 Average Product=TP/Q

Question 15

Marginal Product (MP):

Answer 15

Marginal Product (MP):
 It refers to addition to total product, when one more unit of variable factor is employed.
 For Example: if 10 labours make 60kg of rice and 11 labours make 67 kg of rice, then MP of
11th labour will be 7kg.
 It is also known as ‘Marginal Physical Product’ or ‘Marginal Return’.
 Marginal Product= TPN – TPN-1.

Question 16

Explain the Law of Variable Proportion.

Answer 16

Law of Variable Proportions states that as we increase quantity of only one input keeping
other inputs fixed, total product (TP) initially increases at an increasing rate, then at a
decreasing rate and finally at a negative rate.
 It is also known as ‘Law of Returns’ or ‘Law of Returns to Factor’ or ‘Returns to Variable
Factor’

Question 17

Assumptions of LVP

Answer 17

 Law of Variable Proportions always operate in short run.
 This law applies to field of production only.
 The effect of change in output due to change in variable factor can be easily determined.
 It is assumed that all variable factors are equally efficient.
 The state of technology is assumed to be constant during the operation of this law.

Question 18

the different phases of Law of Variable Proportion

Answer 18

Phase I: Increasing Returns to a Factor (TP increases at an increasing rate)
Phase II. Diminishing Returns to a Factor (TP increase at diminishing rate)
Phase III. Negative Return to a Factor

Question 19

Phase I

Answer 19

 In the first phase, every additional variable factor adds more and more to the total output.
 It means TP increases at an increasing rate and MP of each variable factor also rises.

Question 20

Phase II.

Answer 20

 In the second phase, every additional variable factor adds lesser and lesser amount of
output.
 It means TP increases at a diminishing rate and MP starts falling with increase in variable
factor.
 This phase is known as diminishing return to factor.

Question 21

Phase III

Answer 21

 In the third phase, the employment of additional variable factor causes TP to decline and MP
becomes negative.
 This phase is known as negative returns to factor

Question 22

In which phase does a consumer operate?

Answer 22

A producer will aim to produce in Phase II, as TP is maximum and MP of each variable factor is
positive.

Question 23

Reasons for Increasing Returns to a Factor (Phase I):

Answer 23

1. Better Utilization of the Fixed Factor:
    In the first phase, supply of the fixed factor is too large, whereas variable factors are too
   few.
    He factor is not fully utilized, but when variable factors are increased and combined with
   fixed factor, then fixed factor is better utilized and output increases at an increasing rate.
2. Increased Efficiency of Variable Factor:
    When variable factors are increased with the fixed factor there is a great cooperation and
   high degree of specialization.
    As a result, variable factors work in an efficient manner.
3. Indivisibility of Fixed Factor:
    The fixed factors which are combined with variable factors are indivisible.
    Once an investment is made in an indivisible fixed factor, then addition of more and more
   units, improves the utilization of fixed factor

Question 24

Reasons for Diminishing Returns to a Factor (Phase II)

Answer 24

1. Imperfect Substitutes:
    Diminishing returns occurs because fixed and variable factors become imperfect
   substitutes of each other.
    There is a limit for which they can be substituted with one another.
    After that limit, they become an imperfect substitute which leads to diminishing returns.
2. Optimum Combination of Factors:
    Among the different combinations between variable and fixed factors, there is one
   optimum combination at which TP is maximum.
    After making the optimum use MP begins to diminish.

Question 25

Reasons for Negative Return to a Factor (Phase III):

Answer 25

1. Limitation of Fixed Factor:  The negative return applies because some factors of production are fixed which cannot be increased with increase in variable factor in short run. 2. Poor coordination between variable and fixed factor:  When variable factor becomes too excessive in relation to fixed factor, then they obstruct each other which lead to poor coordination.  As a result, total output falls instead of rising and marginal product becomes negative. 3. Decrease in Efficiency of Variable Factor:  With continuous increase in variable factor, the advantages of specialization and division of labour start diminishing.  It results in inefficiencies of variable factor, which is another reason for the negative return.

Question 26

Explain Law of Diminishing Returns

Answer 26

It states that when more and more units of a variable factor are employed with a fixed factor, then marginal product of the variable factor must fall.  This law is also known as Law of Diminishing Marginal Product

Question 27

Curve of . Law of Diminishing Returns:

Answer 27

 As seen in the above diagram and schedule, MP falls when more and more units of variable factor are employed with the fixed factor.  This law considers only the falling phases of MP and ignores the phase of increasing MP.  LVP is an extension to law of diminishing returns as it considers the phase of rising MP in addition to falling MP

Question 28

relationship between TP and MP

Answer 28

 As long as TP increases at an increasing rate, MP also increases.  When TP increases at a diminishing rate, MP decreases.  When TP reaches it maximum point (M), MP becomes zero.  When TP starts decreasing, MP becomes negative.

Question 29

relationship between AP and MP

Answer 29

When MP is equal to AP, AP is at its maximum.  When MP is less than AP, AP falls.  Both AP and MP falls but MP becomes negative, whereas AP remains positive