In the example given above the complete picture of production function or the process of productive activity has been presented. The entire process is carried out in 7 different units. The first unit has fixed inputs but no variable inputs; so no output is produced. In the second unit one dose or unit of variable input is applied and the output produced is 4 units. For the third production unit the second unit of variable input is applied and the output is more than double. It has increased from 4 to 11. Marginal output is 7 (11 - 4 = 7) units. For production unit 4, the third unit of variable input is applied and the output increases to 18 units. Marginal output is again 7 units (18 - 11 = 7). Hereafter with every additional application of variable inputs total output goes on increasing from 18 to 23 to 25 to 26. Marginal output continuously decreases from 7 to 5 to 2 to 1. Three phases of the production function have been marked in the table. The output increases more than proportionately for the first two variable units. This is the phase of Increasing Marginal Returns (IMR). Then between the second and third variable units marginal addition is constant at 7 units. This is the stage of Constant Marginal Returns (CMR). From the third unit of variable input right upto the sixth unit there is a continuous fall in the marginal output produced. This is the stage of Diminishing Marginal Returns (DMR). The three phases of productive activity together make up for the Law of Variable Returns, which is stated below.

(D) The Law of Variable Proportions or Returns: In the act of production, with constant units of fixed inputs, but progressively increasing units of variable inputs, the output will increase but not in the same proportion. Initially it will increase at an increasing rate (IMR), then at a constant rate (CMR) and finally, at a continuously diminishing rate (DMR).

There are various causes responsible for the variable behavior of output. These include internal and external economies and varying utilization of the capacity of fixed factors. For a single firm, in the short run, external economies are not important. Such a firm may enjoy internal economies in the form of more efficient use of machines and managerial skills, better supervision, avoidance of wastage etc. The chief cause, however, is the degree of utilization of fixed inputs. These lumpy fixed inputs possess optimum capacity of production. For instance, a printing press may turn out 5000 pages of books per day or a manager may supervise 800 workers. So long as this capacity is under utilized the output will increase at an increasing rate. Once the capacity is fully or optimally utilized the output will increase at a constant rate. When the capacity is utilized beyond optimum level output starts increasing at a diminishing rate. Thus the three phases of the production function are closely associated with under utilization, optimum utilization and over utilization of the fixed factors of production.

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Index

9.1 - Concept of a Firm
9.2 - Factors of Production and Product Output
9.3 - Costs and Profits
9.4 - Costs Analysis

Chapter 10