Unit 6
Table of Contents
May 02, 2026
Production Function
The production function states the functional relationship between the factors of production and the number of products.
Q = f (L, C, N)
Here, Q = Quantity of output, L = labour, C = capital, N = land.
Time Elements in Production Function
A) Short run
In the short run, only some of the inputs can be varied, but not all. Some factors will remain fixed, and some will be variable.
B) Long run
In this period, not only can variable factors be increased or decreased, but fixed factors can also be changed. In other words, all factors of production can be varied.
C) Very long run
This time period is so long that even the state of technology is also changed. Such technological changes are initiated by a long process of continuous research and development and it takes a very long time to apply.
Three Aspects of the Production Function
A) Total Production (TP)
Total production refers to the total units of output produced per unit of time by all factor inputs. In the short run, the total output increases because of the alteration in the variable factor inputs, shown mathematically in the equation:
TP = f (QVF)
Where, f = functional relationship, QVF = the quantity of variable factors.
B) Average Production (AP)
AP = TP/QVF
Where, TP = Total Production, QVF = the quantify of variable factors.
C) Marginal Production (MP)
Marginal production refers to the additional units produced with the usage of the last variable factor. In other words, it is the change in total production that takes place due to the addition of a variable factor. All other factors remain constant, and the addition realized in the total product is the marginal product (M.P.). Mathematically, it is shown as:
MP = n – 1
Where, MP = Marginal Production, n = total output increased due to the addition of one unit of the variable factor (n - 1 = total no. of factors before the increase of a marginal unit).
Isoquants
An isoquant is a locus of points that represent the different technically efficient ways of combining the factors of production for producing a fixed level of output. Isoquant term is taken from a Greek word ‘iso’, which implies ‘equal’, and ‘quants’, which means ‘quantity’. The isoquant curve is known as the ‘equal product curve’ or production indifference curve. An isoquant curve presents the locus of points that indicate various combinations of two inputs – capital and labour, producing a specific quantity of output or another combination which produces the same output.
Types of Isoquant Curves
A) Linear Isoquant Curve
This curve is a straight line curve. It implies that by employing either capital or labour through various combinations, any quantity can be produced.
B) Right Angle Isoquant Curve
According to this type of isoquant curve, there is substitution between the factors of production, and they have a major complementary nature between them. This means that there is only a single way of manufacturing any one commodity. This form of the curve is also referred to as the ‘Leontief Iso-quant’ or ‘input-output isoquant’ right-angled curve.
C) Kinked Isoquant Curve
In this form of the curve, there is a limited substitutability between the different factors of production, and this substitution of factors can be observed at the kinks because there are not many processes involved in producing any one commodity. A kinked isoquant curve is also called ‘activity analysis programming isoquant or linear programming isoquant’.
D) Convex Isoquant Curve
In this form of isoquant curve, the factors of production can be substituted with each other only to a certain level. This type of isoquant curve is in a convex shape and is smooth at the origin.
Characteristics of Isoquant Curves
- Isoquant curves slope downwards.
- Isoquant curves are convex to the origin.
- Isoquant curves do not intersect each other.
- A higher isoquant shows a higher level of output.
Marginal Rate of Technical Substitution
The MRTS is a theory in economics that is used to show the rate at which one factor of input should decrease to maintain the same level of output when another factor is increased.
MRTS = MPL/MPK
Where, MPL = Marginal Product of Labour, MPK = Marginal Product of Capital.
Revenue
A) Total Revenue:
TR = AR × Q
Where, TR is Total Revenue, AR = Average Revenue, Q = Output.
B) Average Revenue:
AR = TR/Q
Where, AR = Average Revenue, TR = Total Revenue, Q = Output.
C) Marginal Revenue:
Marginal revenue is the net revenue obtained by selling an extra unit of the concerned commodity. It is the addition made to the total revenue by selling one more unit of the goods. Marginal revenue is computed by the division of the change in the rate of total revenue by the change in the rate of quantity.
MR = ΔTR/ΔQ (Marginal Revenue = Change in Total Revenue/Change in Quantity)