Economics

• Production Function
  

Production function is the relationship between quantities of input and output. It is expressed as Q=F(L,M,N,C,T) where Q stands for the output of a good per unit time , L for labour, M for management, N for land ( natural resources), C capital and T for technology , F states functional relationship. Production function is of two types rigid or flexible. 

• Constant Return to Scale

Q=(L,M,N,C,T) , Given T if quantities of all inputs L,M,N,C are increased n-fold the output Q also increase n-fold. Production function becomes nQ=f(nL,nM,nN,nC). If the production function is of kth degree the function is n^k.Q=f(nL,nM,nN,nC). If k=1 then it is called constant return to scale. If k>1 it is increasing return to scale. If k<1 it is decreasing return to scale.

• Law of Variable Proportions
  

It states that if one input is variable and all other inputs are fixed the firm’s production exhibits law of variable proportions.

Assumptions

• It is possible to change the proportions in which the various factors are combined.
• Only one factor is variable while others are constant.
• All units are homogeneous.
• No change in technology
• Assumes a short run situation
• Price of product is constant. 

• Law of Production Function
  

Stage I

Increasing returns- In stage I it starts from the origin and reaches till point S where MP and AP curves meet. In this stage TP curve also increases rapidly. It denotes increasing average returns because the fixed factor is large in quantity than the variable factor. 

Stage II

Law of Diminishing returns- It starts when the average product is at its maximum to the zero point of the marginal product. In the graph this stage is between SN and HM . In this stage the production is feasible and profitable. 

Stage III

Negative marginal returns- In this stage production don’t takes place. The total product starts declining and marginal product becomes negative. In the graph this stage starts frm HM where MP curve is below the X-axis. To the right of point M the variable input is used excessively so production will not take place.

• Law of Diminishing Returns
  

This law states that as the proportion of one factor in a combination of factors is increased after a point the average and the marginal product of that factor will diminish. The scarcity of one factor in relation to other factors is the root cause of law of diminishing return. Eg. In a tank fisheries as more and more fish are caught the quantity of fish decreases because their quantity is limited in a tank and I addition of labor or capital doesn't increase the amount of fish caught.

• Law of Return to Scale
  

It describes the relationship between output and the scale of input in the long run when all input are increased in same proportion.

Assumptions

• All factors are variable, but enterprise is fixed.
• All workers work with given tools and implements.
• Technological changes are absent.
• There is perfect competition
• Product is measured in quantities.

Explanation

Consider table below.

Unit	Scale of production	Total returns	Marginal returns
1	1 worker + 2 Acres of land	8	8
2	2 workers + 4 Acres of land	17	9
3	3 workers + 6 Acres of land	27	10
4	4 workers +8 Acres of land	38	11
5	5 workers + 10 Acres of land	49	11
6	6 workers + 12 Acres of land	59	10
7	7 workers + 14 Acres of land	68	9
8	8 workers + 16 Acres of land	76	8

This table reveals that in the beginning with the scale of production of (1 worker + 2 acres of land) total output is 8. To increase the output when the scale of production is doubled (2 workers + 4 acres of land) total returns are more than doubled and becomes 17. Now if the scale is trebled (3 workers + 6 acres of land) returns becomes more than three-fold. It shows increasing return to scale.

If the scale of production is increased further total return will increase in such a way that marginal returns become constant. In case of 4th and 5th units of the scale of production marginal return are 11 i.e. return to scale are constant. Increase in the scale of production beyond this limit will lead to diminishing returns.

• Nature of Costs

• Money cost: Money costs are the total money expenses incurred by a firm in producing a commodity. This includes wages of salary of labor, cost of law material, capital goods, and expenditure on machine. 
• Accounting cost: These costs are the costs which an accountant records in thr firm’s book.
• Economic cost: Economic costs include accounting cost and implicit cost.
• Production cost: The production of a commodity includes many costs like total cost, variable cost and fixed cost. Hence the sum of all these costs will give production cost of a commodity.
• Real cost: Efforts and sacrifices undergone by various members of a society in producing a commodity are called real cost. E.g. The efforts made by capitalist to save and invest, by the landlords in the use of land etc. 
• Opportunity cost: This includes costs which are incurred by the firm in producing goods and services directly. e.g., wages and salaries, payment of raw material, power, light, fuel, taxes. This also includes the value of entrepreneur’s own resources and services.
• Private cost: Private costs are the costs which are incurred by a company in producing some kind of service.
• Social cost: These costs include the production activities of the firm which lead to economic benefit or harm for the others. E.g. education provides higher income and satisfaction to citizen while the production of commodity like rubber, chemicals lead to harm to the environment. These lead to social cost.