Day 7 | Micro economics | Production | Chapter 5 | One Shot

Rajat Arora・2 minutes read

Production is a process that creates output from input, with short and long-run production functions playing crucial roles. The Law of Variable Proportions explains how increasing a variable factor can initially boost production before diminishing, emphasizing the relationship between Average and Marginal Product for production analysis.

Insights

  • The Law of Variable Proportions explains how increasing a variable factor initially boosts production, but eventually diminishes, showcasing the impact of variable factors on production efficiency.
  • Understanding the relationship between Average Product (AP) and Marginal Product (MP) is crucial, as AP mirrors the trend of MP - increasing, reaching a maximum, and then decreasing, highlighting the significance of comprehending this connection for effective production analysis.

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Recent questions

  • What is production in economics?

    Creation of output from input, making goods.

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Summary

00:00

Production Unit Completion: Introduction to Demand

  • Production unit will be completed after covering production, with four chapters remaining: Introduction, Demand, Consumers Equilibrium, Elasticity of Demand.
  • Production is the creation of output from input, such as making finished goods from raw materials.
  • Production function is an expression showing how output is created from input using technology.
  • Short run is a period where some factors of production can change, while fixed factors remain constant.
  • Long run is a period where all factors of production can change.
  • Variable factors change in the short run, while fixed factors remain constant.
  • Short run production function refers to changing output by altering only one input while keeping others constant.
  • Long run production function involves changing all inputs to increase output.
  • Product refers to the total output generated by a firm or industry in a specified time period.
  • Three types of products are total product, marginal product, and average product, each measuring different aspects of production efficiency.

14:30

Law of Variable Proportions: Labor Impact Analysis

  • Increasing labor initially led to a rise in production from 45 to 52 units, but the increase was minimal.
  • Adding more labor resulted in a decrease in production by seven units, indicating diminishing returns.
  • Further addition of labor did not impact total production, highlighting the limitation of the fixed factor.
  • Despite employing four or five people, the production remained at 52 units, showcasing the fixed factor's constraint.
  • Continuous addition of labor without increasing the fixed factor led to a decline in overall production to 48 units.
  • The Law of Variable Proportions explains that increasing a variable factor initially boosts production rapidly, but it eventually diminishes.
  • The Law illustrates three phases: increasing returns, diminishing returns, and negative returns, based on the impact of variable factors on production.
  • Increasing returns occur due to efficient utilization of fixed factors and the indivisibility of fixed and variable factors.
  • Diminishing returns arise when fixed and variable factors become imperfect substitutes, leading to overutilization of fixed factors.
  • Negative returns occur when there is a lack of fixed factors, resulting in poor coordination and reduced efficiency of variable factors.

27:45

Understanding Law of Variable Proportion in Production

  • Law of Variable Proportion focuses on the falling faces of MP, ignoring the increasing faces, and is an extension that considers both rising and falling MP faces, defining all three phases.
  • The relationship between Average Product (AP) and Marginal Product (MP) is crucial, with AP following the trend of MP - increasing, reaching a maximum, and then decreasing, emphasizing the importance of understanding their relationship for production analysis.
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