Production Analysis Group 6

PRODUCTION :

A process of converting inputs to outputs The process of addition of utility to the existing matter by changing its form, time, place or even adding utility creating more values


1. 2. 3. 4.

Production classified in 4 categories Land Labour Capital Organization / Entrepreneurship

1)

2) 3)

Land All the natural resources, found under and above the surface of earth. Labour Human factors of production Capital - 2 types of good
a) Consumer Goods b) Capital Goods

4) Organization / Entrepreneuership Which co-ordinates other 3 factors of production in an optimum manner Organizations are referred as Entrepreneurship

 1. 2. 3. 4.

Entrepreneur performs 4 distinct functionsFactor of Co-ordination Decision Making/ Decision Maker Decision Making Involve Risk/Risk Bearer Innovator

1. Factors of Co-ordination Combining factors of co-ordination in an optimum manner 2. Decision Making/ Decision Maker Who takes or makes decision. Risk Involves 3. Risk Bearer - 2 types of risk
a) Insurable Risk E.g.- Fire, Accident b) Non-Insurable Risk E.g.- Competitor risk in market

4. Innovator Entrepreneur is an Innovator. Innovation is one of the most imp. Function of entrepreneur

Q = f ( a, b, c., n )

Two Types Of Production Function: Short run production function Long run production function

Q=f(a, )

At least one factor fixed i.e. b factor fixed

Fixed land,variable labour

LAND 1 acre

LABOUR ( variable) 1

TOTAL PRODUCTION 40

1 acre
1 acre 1 acre 1 acre 1 acre 1 acre

2
3 4 5 6 7

95
160 230 300 360 400

1 acre
1 acre 1 acre

8
9 10

410
410 400

LAW OF INCREASING RETURN

LAW OF CONSTANT RETURN

LAW OF DIMINISHING RETURN

LAND

LABOUR TOTAL ( variable) PRODUCTION 1 2 3 4 5 6 7 40 95 160 230 300 360 400

AVERAGE PRODUCTION 40 47.5 53.3 57.5 60 60 57.14

MARGINAL PRODUCTION 40 55 65 70 70 60 40 constan t increasi ng

1 acre 1 acre 1 acre 1 acre 1 acre 1 acre 1 acre

1 acre
1 acre 1 acre

8
9 10

410
410 400

51.25
45 40

10
0 -10

diminsh ing

 INCREASING RETURN TO SCALE (RTS >1)

CONSTANT RETURN TO SCALE (RTS =1)

DIMINISHING RETURN TO SCALE (RTS <1)

RTS=

q/q n/n

q= quantity n= input

Iso-quant Literally means equal quantity or the same amount of output Also called Equal Product Curve Shows Different Combinations of factor inputs that yields a particular level of output

L a b o r

100 Capital

Iso-Quant Curve

A
L a b o r

B
C D
Capital

100

Factor Combination

Capital

Labor

Quantity of output

100 units

B
C

2
3

6
4

100 units
100

The rate at which one factor input is substituted by the other. Example - K+9L yields 100 units, 2K+6L also yields 100 units. MRTS = Y X

L1
L a b o r

Factor Combination

Units of factor X (Capital)

Units of factor Y (Labor)

MRTS

L2

100

A B C D

1 2 3 4

9 6 4 3

----------3:1 2:1 1:1

K1

K2

Capital

Iso-quant slopes downwards from left to right. It must be convex to the origin. The higher the Iso-quant higher will be the output. No two Iso-quants should intersect.

1.5
L a b o r

1
D

A C E B

0.5

120

0
Capital

100

The Iso-cost line indicates the possible combinations of

labor and capital the firm can hire given a specified budget

Iso-cost line indicates equally costly combinations of inputs The Iso-cost line shows what combinations of Labour and Capital the producer is able to purchase with a fixed cost level Suppose the budget of production is Rs 800/hour and Cost of Labour PL = Rs 8/unit and cost of Capital PC = Rs 10/unit
20

Iso-cost Line
80
Capital Rs 10/unit
A

60

All capital - labour combinations that lie along a single iso-cost line are equally costly.
Budget = 800

40
20 0 0 25 50
Labour Rs 8/unit

The slope of an iso-cost equals the ratio of input factors (- PL / PC).

75

100

21

Profit maximization implies cost minimization The firm chooses a least cost combination of capital and labor

The Optimal Solution, where the producer minimizes cost, is found where the Iso-cost line is tangent to an Iso-quant

22

Capital

150
Iso-cost =900

At points A and B though the input cost is the same as that at point P , the output produced is Q0 (100) units.

Iso-cost =600

100

50

At point P firm minimizes the costs of producing Q1 (150) units of output. Point P is called the Producers Equilibrium

Q1 =150

Q0 =100
30 60 90
Labour

23

At point P Producer maximizes profits by:

Minimizing cost of producing a constant level of output Q1 Maximizing output subject to a cost constraint (Budget = 600)

Slope of Iso-quant gives MRTS and slope of Iso-cost is the ratio of prices of input factors. At point P, slope of Iso-cost line and Iso-quant curve is the same. It follows that when a firm minimizes the cost of producing a particular output, the following condition holds MRTS = MPL/MPK = w/r (w wage cost and r cost of capital)
24

K, Units of capital per hour

4,000 isocost

3,000 isocost

Expansion Path is obtained by joining Producers Equilibrium point for different Isocost Isoquant combinations. The firms Expansion Path indicates the lowest longrun total cost for each level of output.

Expansion path 2,000 isocost z 200 y 150 x 100 q = 300 Isoquant q = 200 Isoquant 0 50 75 100 q = 100 Isoquant L, Workers per hour

Capital intensive and Labour intensive Expansion Path

Economies of scale refers to the cost advantages that a firm can enjoy by expanding their scale of production Economies of scale means a reduction in the per unit costs of a product as a firm's production increases Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods

Internal

Economies are those advantages which a firm enjoys from within itself by way of reduction in its average cost of production as its scale of operation expands. Internal Economies can be classified under five headings:
Technical economies Managerial economies Commercial economies Financial economies

External Economies are those advantages which a firm enjoys indirectly and externally from growth in the size of industry as a whole. External economies can be grouped into three categories.
Economies of concentration Economies of information Economies of disintegration

The disadvantages accruing to the firm when it produces the output beyond a particular point, resulting in an increase in the average cost of production can be termed as diseconomies of scale

These occur when the firm has become too large and inefficient. The potential diseconomies a firm may experience relate to: Control. Co-ordination. Co-operation. Industrial unrest

Excessive concentration or localization of industries will result in diseconomies for the firms located within that region
As the demand for labour goes on increasing the labour cost also rises Diseconomies of concentration may arise because of excessive pressure on transport As the industry gets concentrated in particular region demand for land as well as rent will keep on rising

Agents

Raw

Farms in South India Cultivated by farmers who have leased their land to the company. Reverse Auction System It gives quotations for materials to vendors. Raw material stock comes in 7 days prior to production

Materials

of Production

 Labour 275 workers in the factory, working 3 shifts a day, hence production takes place throughout the day. Land

Farms in South India. Cleansing

and Crushing factory in Sakharwadi in Satara. Dairy processing plants in Induri, Final production in Thane and Pune factory (Where the research was carried out)

 Capital - Machines are bought in from UK and Germany. Thane factory produces 450 tonnes of chocolate in a month. Production is 940 bars of Cadbury Dairy Milk in a minute, Cadbury Crackle and Temptation 200 bars Total Production is 17000 tonnes country wide

Different demand during different periods. The data of demand and supply during the previous years helps in forecasting requirements. Planning activities have to incorporate Factory, Process and Operations Planning.