Question

Explain the importance of the production function. What is MPP? If MPP is falling, what can be assumed about marginal costs? HTML Edito BI YAA - IX E 1 1 1 XX, EE NV GV O 12pt - Paragraph -

Answer 1

Output is the result of combined working of land, labour, capital and organization. The functional relation between these inputs and output is known as production function. The normal production function can be expressed as Q=f(L, K), where Q is the quantity of output and L and K are the quantity of labour and capital required for the production of output Q. But the Cobb-Douglas production function is more elaborated as it includes the role of natural resources, raw materials and entrepreneurship. The production function thus can be expressed as Q=f( K, L, P, H) where K is the physical capital, L is the labour, P is the natural resources and raw materials and H is the entrepreneurial ability.

The production function shows how much inputs are required to produce a given level of output and how the output varies when some factors are fixed in shortrun or all factors are varied in longrun. Thus production function gives an insight that how much cost a firm has to incur in order to produce a given level of output which is a key knowledge in the determination of price and quantity of output.

The production function helps to determine the rewards for the factor input. Each firm fixes the reward of inputs according to the marginal contribution of each factor. In shortrun the marginal contribution of each factor diminishes due to the operation of diminishing returns in production. Thus each firm hires an additional factor upto a point where its marginal product is equal to the marginal cost of the factor.

The production function gives the information like increasing returns and decreasing returns. Thus the firm can limit or expand the use of input according to the concerned returns operate in production.

The production function helps to determine the quantity of output to be produced and the price to be charged for each output. Each firm choose to produce at a point where the marginal cost is equal to price.

Marginal Physical Product (MPP) is the additional output produced by an addional variable input. It is obtained by dividing the change in total product by the change in variable input. The relation between Marginal Physical Product (MPP) and Marginal Cost (MC) is inverse. Marginal Physical Product is the additional output produced by an additional worker. Marginal Cost is extra cost incurred for the employment of an additional worker. As the Marginal Physical Product increases the Marginal cost decreases. In other words the value of output from an additional worker is higher than the cost a firm incurred for the additional worker. While the Marginal Physical Product decreases the Marginal Cost increases. In other words the value of output obtained by an additional worker is less than the cost that a firm incurs to obtain an additional worker. The increase in Marginal Physical product is due to the operation of increasing returns and the decrease in Marginal Physical Product is due to the diminishing returns. Initially the efficiency of workers increases due to specialization. Then the MPP increase. After a stage the workers become congested and they began to waste time in waiting tools and equipments and the managers will be unable to control the workers properly. This will reduce the contribution of each worker to the total output. Since the MPP decreases the cost on each worker increase.