MBA Semester 1 Assignments answers for MB0042- Q1. What is production function and its uses? Explain the two types of production functions.

Answer: The entire theory of production centres revolves around the concept of production function. A “production function” expresses the technological or engineering relationship between physical quantity of inputs employed and physical quantity of outputs obtained by a firm. It specifies a flow of output resulting from a flow of inputs during a specified period of time. It may be in the form of a table, a graph or an equation specifying maximum output rate from a given amount of inputs used. As it relates inputs to outputs, it is also called “input-output relation.” The production is purely physical in nature and is determined by the quantum of technology, availability of equipments, labour, raw materials, etc. employed by a
firm.

Uses of production function

Though production function may appear as highly abstract and unrealistic, in reality, it is both logical and useful. It is of immense utility to the managers and executives in the decision making process at the firm level.

There are several possible combinations of inputs and, decision makers have to choose the most appropriate among them. The following are some of the important uses of production function:

1. It can be used to calculate or work out the least cost input combination for a given output or the maximum output-input combination for a given cost.

2. It is useful in working out an optimal and economic combination of inputs for getting a certain level of output. The utility of employing a unit of variable factor input in the production process can be better judged with the help of production function. Additional employment of a variable factor input is desirable only when the marginal revenue productivity of that variable factor input is greater than or equal to cost of employing it in an organisation.

3. Production function also helps in making long run decisions. If returns to scale are increasing, it is wise to employ more factor units and increase production. If returns to scale are diminishing, it is unwise to employ more factor inputs & increase production. Managers will be indifferent whether to increase or decrease production, if production is subject to constant returns to scale.

There are two types of production functions. They are as follows:

1. Short run production function – In this case, the producer will keep all fixed factors as constant and change only a few variable factor inputs. In the short run, we come across two kinds of production functions:

Quantities of all inputs both fixed and variable will be kept constant and only one variable input will be varied, for example, law of variable proportions.

Quantities of all factor inputs are kept constant and only two variable factor inputs are varied, for example, iso-quants and iso-cost curves.

2. Long run production function – In this case, the producer will vary the quantities of all factor inputs, both fixed as well as variable in the same proportion, for example, the laws of returns to scale.

Each firm has its own production function which is determined by the state of technology, managerial ability, organisational skills, etc of a firm. It may be in the following manner:

1. The quantity of inputs may be reduced while the quantity of output may remain same.

2. The quantity of inputs may be reduced while the quantity of output may increase.

3. The quantity of inputs may be kept constant while the quantity of output may increase.