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Production is a process of transformation that connects factor inputs and outputs. The process of transforming inputs into outputs can be anyone of the following three kinds: change in form (e.g.raw materials transformed to finished goods), change in space (i.e. transportation) and change in time (i.e. storage).
A production function is purely a technical relation that connects factor inputs and outputs. It shows the relationship between the quantity of output and the quantities of inputs (of labor, land and capital). Total production is the total quantity of output produced during a time period. Average product is equal to total output divided by the total quantity of inputs used. The marginal product of an input (say labor) is the extra product produced or added by using I extra unit of input (labor) while keeping other inputs constant. Mathematically, marginal product of labor (MPL))= T P/ L, where TP is the total production and L is the labor units used.
The shape of the total product curve is determined by the law of diminishing returns, The law of diminishing returns, being empirical in nature, states that with given state of technology, if the quantity of one factor input is increased by equal increments, when all other inputs are held constant, the resulting increment of total product will first increase but decrease after a particular point. The law, therefore, is also known as the law of eventually diminishing returns to factors. The law of diminishing returns is applicable only in the short run since in the long run all factor inputs can be changed.
The relationship between total product and marginal product is such that total product will be Maximum when marginal product is zero. The average product attains its maximum point, when the marginal product equals average product.
Short run is a period of production during which some inputs cannot be varied. By contrast, long refers to a period of production that gives enough time to vary all the factor inputs to produce a good.
The law of production describes the technically possible ways of increasing the level of output by changing all the factors of production which is possible only in the long run increases more(less) than proportionately with an increase in the factor Inputs, the situation is one Increasing (decreasing) returns to scale.
An isoquant curs e is a that different combinations of two inputs which yields a given or same I&QI of output. An isoquant like also as equal output curve or equal product curve. The isoquant, like indifference curve, slopes downward in accordance with the law of diminishing marginal product. Parallel equal product curves do not represent the same output.
Marginal Rate of Technical Substitution (MRTS) measures, output being constant, the rate at which labor can be substituted for capital. If the two inputs were perfect substitutes, the isoquants would be straight lines and if they had no substitutability at all, the isoquants would be rectangular in shape.
An isocost line shows all possible combinations of factor inputs that can be brought with a given amount of money. The point where an equal-cost line is tangential to an equal-product curve (isoquant curve) is the output maximizing point under given cost constraints. Mathematically, output maximization given the cost constraint equation is MPL/MPK = w/r.
The expansion path is the locus of all input combinations for which the marginal rate of technical substitution (MRTS) is equal to the factor price ratio. If there are two factors of production and If their prices are constant, we can get a number of parallel isocost lines. Each isocost line will be tangent to one of the isoquants. The locus of all such points of tangencies between the isoquants and the parallel isocost lines is the expansion path for the firm. The points on the expansion path are the most efficient combinations of the two inputs.
Technological change refers to a change in the present techniques of production, which may involve new products, improvements or cost reductions for existing products.