LECTURE NO-21
BASIC PRODUCTION RELATIONSHIP
1.FACTOR-PRODUCT RELATIONSHIP
PROF-SHARAD PATIL
BASIC PRODUCTION RELATIONSHIPS
Production of farm commodities involves numerous
relationships between resources and products.
Some of these relationships are simple, others are complex.
Knowledge of these relationships is essential as they provide
the tools by means of which the problems of production or
resource use can be analyzed.
Major production relationships are:
1. Factor -Product relationship
2. Factor -Factor relationship
3. Product-Product relationship
1.Factor-Product Relationship
It deals with the production efficiency of
resources.
The rate at which the factors are transformed in
to products is the study of this relationship.
Optimization of production is the goal of this
relationship.
This relationship is known as input-output
relationship by farm management specialists and
fertilizer responsive curve by agronomists.
1.Factor-Product Relationship
Factor -Product relationship guides the producer in
making the decision ‘how much to produce?’.
This relationship helps the producer in the determination
of optimum input to use and optimum output to
produce.
Price ratio is the choice indicator.
This relationship is explained by the law of diminishing
returns.
Algebraically, this relationship can be expressed as
Y = f (X1 / X 2,X3… Xn)
Law of Diminishing Returns
The factor - product relationship or the amount of a
resource that should be used and consequently the
amount of output that should be produced is directly
related to the operation of law of diminishing returns.
This law explains how the amount of product
obtained changes as the amount of one of the
resources is varied while the amount of other
resources is fixed.
It is also known as law of variable proportions or
principle of added costs and added returns.
Definitions
An increase in capital and labour applied in the
cultivation of land causes in general less than
proportionate increase in the amount of produce
raised, unless it happens to coincide with the
improvements in the arts of agriculture (Marshall)
OR
If the quantity of one of productive service is
increased by equal increments, with the quantity of
other resource services held constant, the
increments to total product may increase at first but
will decrease after certain point (Heady)
Limitations
The law of diminishing returns fails to
operate under certain situations. They are
called limitations of the law.
Improved methods of cultivation
New soils and
Insufficient capital.
Why the law of diminishing returns
operates in Agriculture
The law of diminishing returns is applicable not only
to agriculture but also manufacturing industries.
This law is as universal as the law of life itself. If
the industry is expanded too much and becomes
unwidely, supervision will become difficult and the
costs will go up.
The law of diminishing returns, therefore set in. The
only difference is that in agriculture it sets in earlier
and in industry much later.
There are several reasons for the operation of law of
Why the law of diminishing returns
operates in Agriculture
The reasons are:
Excessive dependence on weather.
Limited scope for mechanization.
Limited scope for division of labour.
Agriculture uses larger proportion of land
resource.
Soil gets exhausted due to continuous
cultivation.
Cultivation is extended to inferior lands.
Concepts of production
1.Total product (TP): Amount of product which results from
different quantities of variable input. Total product indicates
the technical efficiency of fixed resources.
2.Average Product (AP): It is the ratio of total product to
the quantity of input used in producing that quantity of
product.
AP= Y/X
where Y is total product and X is total input.
Average product indicates the technical efficiency
of variable input.
Concepts of production
3.Marginal product (MP): Additional quantity of output
∆𝐘
resulting from an additional unit of input.
Change in total product
𝑀𝑃= 𝐌𝐏=
Change in input level ∆𝐗
4.Total Physical Product (TPP): Total product expressed in
terms of physical units like kgs, quintals, tones is
termed as total physical product.
Similarly if AP and MP are expressed in terms of
physical units, they are called Average Physical
Product (APP) and Marginal Physical Product (MPP).
Concepts of production
5.Total Value Product (TVP): Expression of
TPP in terms of monetary value, it is called
Total Value Product.
TVP = TPP X Py or Y X Py
Where, TPP= Total Physical Product
Py= Price unit of Product
Concepts of production
6.Average Value Product (AVP): The
expression of Average Physical Product in
money value.
AVP = APP X Py
7.Marginal Value Product (MVP): When
∆𝐗
MPP is expressed in terms of money
𝐌𝐕𝐏= 𝐌𝐏𝐏𝐗𝐏𝐲 𝐨𝐫 𝐗𝐏𝐲
∆𝐗
value, it is called Marginal Value Product.
Relationship between
Total Product (TP) and Marginal Product
(MP)
When Total Product is increasing, the Marginal Product is positive.
When Total Product remains constant, the Marginal Product is zero.
When Total Product decreases, Marginal Product is negative.
As long as Marginal Product increases, the Total Product increases
at increases at increasing rate.
When the Marginal Product remains constant, the Total Product
increases at constant rate.
When the Marginal Product declines, the Total Product increases
at decreasing rate.
When Marginal Product is zero, the Total Product is maximum.
When marginal product is less than zero (negative), total physical
product declines at increasing rate.
Relationship between Marginal and Average
Product
When Marginal Product is more than
Average Product, Average Product
increases.
When Marginal Product is equal with the
Average Product, Average Product is
Maximum.
When Marginal Product is less than
Average Product, Average Product
Relationship between TP, AP and MP
Input Total Product Average Marginal Remarks
(X) (Y) Product Product
AP = Y/ X MP= Y/ X
0 0 - - -
1 2 2 2
2 5 2.5 3 Increasing
Returns
3 9 3 4
4 14 3.5 5 Constant
5 19 3.8 5 Returns
6 23 4 4
7 26 3.71 3 Decreasing
Returns
8 28 3.5 2
9 29 3.22 1
10 29 2.9 0 Negative
11 28 2.54 -1 Returns
12 26 2.16 -2
Elasticity of Production (Ep)
It is a measure of responsiveness of output to
changes in input.
The elasticity of production refers to the
proportionate change in output as compared to
proportionate change in input.
Elasticity of Production (Ep)
By rearranging we have
The elasticity of production is the ratio of Marginal Physical
Product to Average Physical Product.
Ep = 1 ,Constant Returns. Ep is one at MPP = APP (At the end of I
stage)
Ep > 1 , Increasing Returns (I Stage of Production)
Ep < 1 , Diminishing returns (II Stage of Production)
Ep = 0 , When MPP is zero or TPP is Maximum (At the end of II stage)
Ep < 0, Negative Returns (III Stage of Production)
Three Stage of Production Function
Three Regions of Production Function
The production function showing total,
average and marginal product can be
divided into three regions, stages or zones
in such a manner that one can locate the
zone of production function in which the
production decisions are rational.
The three sages are shown in the figure.
First Stage or I Region or Zone 1
The first stage of production starts from the origin i.e., zero
input level.
In this zone, Marginal Physical Product is more than Average
Physical Product and hence Average Physical Product
increases through out this zone.
Marginal Physical Product (MPP) is increasing up to the point
of inflection and then declines.
Since the marginal Physical Product increases up to the point
of inflection, the Total Physical Product (TPP) increases at
increasing rate.
After the point of inflection, the Total Physical Product
increases at decreasing rate.
First Stage or I Region or Zone 1
Elasticity of production is greater than unity up to
maximum Average Physical Product (APP).
Elasticity of production is one at the end of the zone (MPP
= APP).
In this zone fixed resources are in abundant quantity
relative to variable resources.
The technical efficiency of variable resource is increasing
throughout this zone as indicated by Average Physical
Product.
The technical efficiency of fixed resource is also increasing
as reflected by the increasing Total Physical Product.
First Stage or I Region or Zone 1
Marginal Value Product is more than Marginal
Factor Cost (MVP >MFC)
Marginal revenue is more than marginal cost
(MR > MC )
This is irrational or sub-optimal zone of
production.
This zone ends at the point where MPP=APP or
where APP is Maximum.
Second Stage or II Region or Zone II
The second zone starts from where the technical efficiency of
variable resource is maximum i.e., APP is Maximum
(MPP=APP)
In this zone Marginal Physical Product is less than Average
Physical Product. Therefore, the APP decreases throughout this
zone.
Marginal Physical Product is decreasing throughout this zone.
As the MPP declines, the Total Physical Product increases but
at decreasing rate.
Elasticity of production is less than one between maximum APP
and maximum TPP.
In Elasticity of production is zero at the end of this zone.
Second Stage or II Region or Zone II
This zone variable resource is more relative to fixed factors.
The technical efficiency of variable resource is declining as
indicated by declining APP.
The technical efficiency of fixed resource is increasing as reflected
by increasing TPP.
Marginal Value Product is equal to Marginal Factor Cost
(MVP=MFC).
Marginal Revenue is equal to Marginal Cost (MR= MC)
This is rational zone of production in which the producer should
operate to attain his objective of profit maximization.
This zone ends at the point where Total Physical Product is
maximum or Marginal Physical Product is zero.
Third Stage or III Region or Zone III
This zone starts from where the technical efficiency of fixed
resource is maximum (TPP is Max).
Average Physical Product is declining but remains
positive.
Marginal Physical Product becomes negative.
The Total Physical Product declines at faster rate since
MPP is negative.
Elasticity of production is less than zero (Ep < 0)
In this zone variable resource is in excess capacity.
The technical efficiency of variable resource is
decreasing as reflected by declining APP.
Third Stage or III Region or Zone III
The technical efficiency of fixed resource is also
decreasing as indicated by declining TPP.
Marginal Value Product is less than Marginal
Factor Cost (MVP < MFC)
Marginal Revenue is less than Marginal Cost ( MR
< MC)
This zone is irrational or supra-optimal zone.
Producer should never operate in this zone even
if the resources are available at free of cost.
Three Regions of Production-Economic
decisions
Stage - I
It is called irrational zone of production.
Any level of resource use falling in this region is uneconomical.
The technical efficiency of variable resource is increasing
throughout the zone (APP is increasing). Therefore, it is not
reasonable to stop using an input when its efficiency is
increasing.
In this zone, more products can be obtained from the same
resource by reorganizing the combination of fixed and variable
inputs. For this reason, it is called irrational zone of
production.
Three Regions of Production-Economic decisions
Stage -II
It is rational zone of production.
Within the boundaries of this region is the area
of economic relevance.
Optimum point must be somewhere in this
rational zone.
It can, however, be located only when input
and output prices are known.
Three Regions of Production-
Economic decisions
Stage -III
It is also an area of irrational production.
TPP is decreasing at increasing rate and MPP is negative.
Since the additional quantities of resource reduces
the total output, it is not profitable zone even if the
additional quantities of resources are available at
free of cost. In case if a farmer operates in this zone, he
will incurred double loss. i.e., Reduced Production
Unnecessary additional Cost of inputs.
