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Economics Study Material SSC CGL/CHSL :: Production and Its Laws

Economics Study Material SSC CGL / CHSL :: Production and Its Laws

Economics Study Material SSC CGL/CHSL :: Production and Its Laws

Production-

In Economics the term production means a process by which resources are transformed into a different more useful commodity or service. In general, production means transforming inputs into an output.

In the economic sense production process may take a variety of forms other than manufacturing. For example transferring a commodity from one place to another where it can be used in the process of production is production.

Inputs and Outputs –

  • An input is a good or service that goes into the process of production. In the words of Baumol, “An input is simply anything that the firm buys for its use in production or other processes.
  • An output is any good or service that comes out of the production process.

Fixed and Variable Inputs –

  • In the economic sense, A fixed input is one whose supply is inelastic in the short run. In the technical sense, a fixed factor is one that remains constant for a certain level of output.
  • A variable input is one whose supply in the short run is inelastic. All users of such factors can employ a larger quantity in the short run. Technically, a variable input is that changes with the change in output. In the long run all inputs are variable.

Short Run and Long Run –

  • The reference to time period involved in production process is another important concept used in production analysis.
  • Short run refers to a period of time in which the supply of certain inputs is fixed or is inelastic
  • The long run refers to a period of time in which the supply of all inputs is elastic, but not enough to permit a change in technology.

Production Function-

Production function is a tool of analysis used to explain the input-output relationship. A production function describes the technological relationship between inputs and output in physical terms. In its general, it tells that production of a commodity depends on certain specific inputs. In its specific form, it represents the quantitative relationship between inputs and outputs.

Accordingly there are 2 kinds of production functions

  1. Short run production function
  2. Long run production function

 The Laws of Production-

 

The traditional theory of production studies the marginal input-output relationships under-

  1. Short run conditions
  2. Long run Conditions

Economics Study material
 

Short term laws of production-

  • The Law of returns to variable input: the Law of diminishing returns
  • The law of diminishing returns states that when more units of a variable input are applied to a given quantity of fixed inputs, the total output may initially increase at an increasing rate and the at a constant rate but it will eventually increase at diminishing rates.

    Assumptions:

  1. The state of technology is given
  2. Labor is homogeneous
  3. Input prices are given

 

  Factors behind Law of Return-

  • Indivisibility of fixed factor
  • Division of labor

 

Application of the law of diminishing returns-

The law cannot be applied universally. It may operate quickly in some and slow in others and there may be cases where this may not appear at all. It has been found to operate in agriculture more than in industries.

 The law of Diminishing returns and business decisions-

The law of diminishing returns as presented graphically has a relevance to the business decisions. The graph can help in identifying the rational and irrational stages of operations.

 

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