Agriculture Production Economics

PRODUCTION FUNCTION “It is the technical & mathematical relationship describing the manner & the extent to which a particular products depends upon the quantities of inputs or services of inputs used at a given level of technology & in a given period of time”

 I. It is a technical relation.  The engineer sees that the various combinations of inputs are applied and the output resulting from them by using a particular process of production. There are many processes of production and for each process there is a relationship between various combinations of inputs and resulting output.  2- It has economic importance.  Production function has got an economic importance for the entrepreneurs. It helps the entrepreneurs to minimize the output form a given combination of inputs.  3. Production functions differ from firm to firm:  Each firm has its own production function. This production function is determined by the state of technology. If the state of technology changes the old production function is disturbed.

Assumptions of production function  1. It is associated with specified period of time.  2. The state of technology is constant during the period of time.  3. The producer is expected to use the best and the most efficient technique.  4. The factors of production are divisible.

Cont…  Total physical product:  Total amount of output obtained by using different units of inputs.  TPP increases, tech.efficiency of fixed resources also increases.  Average physical product:  Avg. amount of output produced by each corresponding units of input.  APP increases, tech.efficiency of variable resources also increases.  APP= TPP/ INPUT LEVEL or Y/X

Cont…  Marginal physical product:  Additional amount of output added by an additional unit of input.  Change in output as a result of change in variable input.  MPP = Change in TPP/ Change in input level.  MPP = DELTA Y / DELTA X

ELASTICITY OF PRODUCTION  %-age change in output / %-age change input.  Denoted by E p.  E p = MPP/APP.

RELATIONSHIP B/W TPP, MPP & AAP  As long as MPP is increasing, TPP is increasing at an increasing rate till the point of MPP max.  After that point TPP increases at a decreasing rate.  When MPP=0, Then TPP=Maximum.  -ve MPP results in decreasing TPP.  +ve MPP results in increasing TPP.

STAGES OF PRODUCTION FUNCTION  Production function can be divided into 3 stages.  Stage I  Stage II  Stage III

STAGES OF PRODUCTION FUNCTION  STAGE-I  Starting point = Origin  Ending point = MPP = APP  TPP increases at increasing rate upto the point of inflection.  APP is increasing throughout this stage.  MPP increases upto the point of inflection.  MPP>APP  E P > 1 (Throughout this stage)

CONT…  E P = 1 (At the end of this stage)  Tech. efficiency of variable & fixed resources increases.  Fixed resources are abudant.

STAGES OF PRODUCTION FUNCTION  STAGE-II  Starting point = APP max  Ending point => MPP = 0  MPP < APP but both exhibit declining trend.  TPP increases at decreasing rate.  E P < 1 (Throughout this stage)

STAGES OF PRODUCTION FUNCTION  E P = 0 (At the end of this stage)  Tech. efficiency of variable resources decreases but of the fixed resource increase.  Variable resources are abudant.

STAGES OF PRODUCTION FUNCTION  STAGE-III  Starting point => MPP = 0 or TPP = Max.  TPP decreases at increasing rate.  APP decreases throughout this stage.  MPP becomes –ve.  E P < 0.  Tech. efficiency of variable resources & fixed resource decreases.  Variable resources is in excess capacity.

OPTIMUM LEVEL OF INPUT  MVP OF INPUT:  Additional income received from using an additional unit of input.  MVP = Change in the total value product / Change in input level. Or  MVP = DELTA TR / DELTA X

Cont…  MIC:  Change in the total input cost by using an additional unit of input.  Price per unit of input.  MIC = Change in the total value product / Change in input level. Or  MIC = DELTA TC / DELTA X

DETERMINATION OF OPTIMUM LEVEL OF INPUT INPUT LEVEL TPPMPPTVPMVPMIC O O *

OPTIMUM LEVEL OF OUTPUT INPUT LEVEL TPPMPPTRMRMC INPUT COST / MPP *