PRODUCTION ANALYSIS
SCOPE


PRODUCTION POSSIBILITY ANALYSIS.
―
LAW OF VARIABLE PROPORTION.
―
LAW OF RETURN TO SCALE.
ISOQUANT - ISOCOST ANALYSIS.
PRODUCTION ANALYSIS
INPUT
PRODUCTION
DEFENCE SERVICES PRODUCERS – THEY
OUTPUT
SATISFY NEEDS OF NATIONAL SECURITY
PRODUCTION: CONVERSION OR TRANSFORMATION
OF INPUTS TO OUTPUT.
PROCESS ADDS VALUE TO INPUTS TO SATISFY
NEEDS/ WANTS.
PRODUCTION: ADDITION OF VALUE/ UTILITY.
PRODUCTION ANALYSIS
INPUT
OUTPUT
PRODUCTION
PRODUCTION ANALYSIS
PRODUCTION ANALYSIS: LAWS GOVERNING
RELATIONSHIP BETWEEN INPUTS & OUTPUTS.
LAWS HELP DECIDE OPTIMAL COMBINATION OF
INPUTS (RESOURCES) FOR DESIRED RESULTS AT
LOWEST COST.
DEFENCE SERVICES
PRODUCTION ANALYSIS


LAWS

LAW OF VARIABLE PROPORTIONS.

LAW OF RETURN TO SCALE.
ANALYSIS TECHNIQUES

PRODUCTION POSSIBILITY ANALYSIS.

ISO-COST / ISO-QUANT ANALYSIS.
PRODUCTION ANALYSIS
INPUT
OUTPUT
PRODUCTION
PRODUCTION ANALYSIS
PRODUCTION ANALYSIS: LAWS GOVERNING
RELATIONSHIP BETWEEN INPUTS & OUTPUTS.
LAWS HELP DECIDE OPTIMAL COMBINATION OF
INPUTS (RESOURCES) FOR DESIRED RESULTS AT
LOWEST COST.
PRODUCTION FUNCTION
SUBSTITUTION OF RESOURCE

WITHIN ONE INPUT ITSELF: INCREASE/
DECREASE

ONE INPUT BY ANOTHER.
PRODUCTION FUNCTION
• RELATIONSHIP •BETWEEN
INPUTS AND
INFANTRY Vs MECHANISED
OUTPUTS
• AD AIRCRAFT Vs MISSILES
• GUNS Vs GROUND STRIKE AIRCRAFT
• P = f (R1,R2…Rn)
LAW OF VARIABLE PROPORTIONS

HOW TOTAL & MARGINAL OUTPUT IS AFFECTED
BY CHANGE IN ONE INPUT KEEPING OTHER
INPUTS CONSTATNT.

“AS PROPORTION OF ONE FACTOR IN A
COMBINATION OF FACTORS IS INCREASED,
MARGINAL & AVERAGE OUTPUTS WILL INCREASE
THEN AFTER A POINT, FIRST MARGINAL AND
THEN AVERAGE OUTPUT WILL DIMINISH”.

APPLICABLE IN SHORT RUN.
LAW OF VARIABLE PROPORTIONS

EFFECT ON OUTPUT: THREE STAGES

INCREASING RETURNS – MARGINAL RETURN
RISES

CONSTANT RETURNS – MARGINAL RETURN
FALLS

DIMINISHING RETURNS – MARGINAL RETURN
BECOMES NEGATIVE
LAW OF VARIABLE PROPORTIONS
PRODUCTION OF AMN SHELLS PER MACHINE PER
HOUR IN ORD FACTORY
NO OF
WORKERS
TOTAL
PRODUCTION
AVERAGE
PRODUCTION
MARGINAL
PRODUCTION
1
8
8
8
2
20
10
12
3
36
12
16
4
48
12
12
5
55
11
8
6
60
10
5
7
60
8.6
0
8
56
7
-4
STAGES OF
PRODUCTION
LAW OF VARIABLE PROPORTIONS
PRODUCTION OF AMN SHELLS PER MACHINE PER
HOUR IN ORD FACTORY
NO OF
WORKERS
TOTAL
PRODUCTION
AVERAGE
PRODUCTION
MARGINAL
PRODUCTION
STAGES OF
PRODUCTION
1
8
8
8
I
2
20
10
12
I
3
36
12
16
I
4
48
12
12
II
5
55
11
8
II
6
60
10
5
II
7
60
8.6
0
III
8
56
7
-4
III
LAW OF VARIABLE PROPORTIONS
CONSTANT
DIMNISHING
RETURN:INCREASE
INCREASE
ININOUTPUT
OUTPUT LESS
INCREASING
RETURN:RETRUN:
INCREASE
IN OUTPUT
MORE
PROPORTIONATE
THAN
PROPORTIONATE
TO INCREASE
TO INCREASE
IN INPUT
IN INPUT
THAN PROPORTIONATE
TO INCREASE
IN INPUT
1
2
OPTIMAL POINT
IN EMPLOYMENT
TP
STAGE I II
OF FACTOR
III
A
MP > AP
MP/AP
B
AP > MP
AP
LABOUR
MP
EXAMPLES OF LAW OF VARIABLE
PROPORTIONS

NO OF AIRCRAFT TAKING PART IN BOMBING
MISSION AND DESTRUCTION SOUGHT.

NO OF GUNS ALLOTTED TO NEUTRALISE A
TARGET AND EFFECT ACHIEVED.

AMOUNT OF TIME ALLOCATED TO TRAINING AND
STANDARDS ACHIEVED.

NO OF MEN ALLOCATED TO A TASK AND
OUTPUT.

IN SHORT, IN SITUATIONS WHERE ONE FACTOR
IS INCREASED, WHILE OTHERS REMAIN
CONSTANT.
LAW OF VARIABLE PROPORTIONS
ASSUMPTIONS

NO CHANGE IN TECHNOLOGY
IMPROVEMENT IN TECHNOLOGY BOUND
TO RAISE OUTPUT.

ONLY ONE FACTOR VARIABLE, REST
CONSTANT.
LAW OF RETURN TO SCALE

DEALS WITH EFFECT ON OUTPUT, WHEN ALL
INPUTS CHANGE SIMULTANEOUSLY IN SAME
RATIO - DOUBLE, TREBLE ETC…

LARGER THE SCALE OF ACTIVITIES – LOWER
GENERALLY THE COST OF ACHIEVING
OUTPUT.

ECONOMIES OF SCALE ARISE FROM LARGE
SCALE ACTIVITIES.
LAW OF RETURN TO SCALE

ECONOMIES RESULT FROM

EFFICIENT USE OF RESOURCES

FULLER UTILISATION OF EXISITING CAPACITY

R&D
LAW OF RETURN TO SCALE


ECONOMIES OF SCALE

TRUE ONLY UP TO A POINT.

THEN DIS-ECONOMIES SETS IN.
THREE STAGES

INCREASING RETURNS – MARGINAL RETURN
RISES

CONSTANT RETURNS – MARGINAL RETURN
CONSTANT

DIMINISHING RETURNS – MARGINAL RETURN
DIMNISHES
RETURNS TO SCALE
(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)
FACTORS OF PRODN EMP
TOTAL
PRODUCTS
/RETURNS
MARGINAL
PRODUCT/
RETURNS
STAGE OF
RETURN TO
SCALE
RETURNS TO SCALE
(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)
FACTORS OF PRODN EMP
1 WORKER+3 hrs
TOTAL
PRODUCTS
/RETURNS
MARGINAL
PRODUCT/
RETURNS
STAGE OF
RETURN TO
SCALE
RETURNS TO SCALE
(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)
FACTORS OF PRODN EMP
1 WORKER+3 hrs
2 WORKERS + 6 hrs
TOTAL
PRODUCTS
/RETURNS
MARGINAL
PRODUCT/
RETURNS
STAGE OF
RETURN TO
SCALE
RETURNS TO SCALE
(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)
FACTORS OF PRODN EMP
1 WORKER+3 hrs
2 WORKERS + 6 hrs
3 WORKERS + 9hrs
4 WORKERS+ 12 hrs
5 WORKERS +15 hrs
6 WORKERS + 18 hrs.
7 WORKERS + 21 hrs
8 WORKERS + 24 hrs
9 WORKERS + 27 hrs
TOTAL
PRODUCTS
/RETURNS
MARGINAL
PRODUCT/
RETURNS
STAGE OF
RETURN TO
SCALE
RETURNS TO SCALE
(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)
FACTORS OF PRODN EMP
TOTAL
PRODUCTS
/RETURNS
1 WORKER+3 hrs
200
2 WORKERS + 6 hrs
500
3 WORKERS + 9hrs
900
4 WORKERS+ 12 hrs
1400
5 WORKERS +15 hrs
1900
6 WORKERS + 18 hrs.
2400
7 WORKERS + 21 hrs
2800
8 WORKERS + 24 hrs
3100
9 WORKERS + 27 hrs
3200
MARGINAL
PRODUCT/
RETURNS
STAGE OF
RETURN TO
SCALE
RETURNS TO SCALE
(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)
FACTORS OF PRODN EMP
TOTAL
PRODUCTS
/RETURNS
MARGINAL
PRODUCT/
RETURNS
1 WORKER+3 hrs
200
200
2 WORKERS + 6 hrs
500
300
3 WORKERS + 9hrs
900
400
4 WORKERS+ 12 hrs
1400
500
5 WORKERS +15 hrs
1900
500
6 WORKERS + 18 hrs.
2400
500
7 WORKERS + 21 hrs
2800
400
8 WORKERS + 24 hrs
3100
300
9 WORKERS + 27 hrs
3200
100
STAGE OF
RETURN TO
SCALE
RETURNS TO SCALE
(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)
FACTORS OF PRODN EMP
TOTAL
PRODUCTS
/RETURNS
MARGINAL
PRODUCT/
RETURNS
1 WORKER+3 hrs
200
200
2 WORKERS + 6 hrs
500
300
3 WORKERS + 9hrs
900
400
4 WORKERS+ 12 hrs
1400
500
5 WORKERS +15 hrs
1900
500
6 WORKERS + 18 hrs.
2400
500
7 WORKERS + 21 hrs
2800
400
8 WORKERS + 24 hrs
3100
300
9 WORKERS + 27 hrs
3200
100
STAGE OF
RETURN TO
SCALE
STAGE OF
INCREASING
RETURNS
STAGE OF
CONSTANT
RETURNS
STAGE OF
DECREASING
RETURNS
LAW OF RETURN TO SCALE
OPTIMAL POINT IN
EMPLOYMENT OF FACTORS
6
5
MARGINAL
4
OUTPUT
3
STAGE 2
STAGE 1
STAGE 3
MARGINAL
PRODUCT
CURVE
2
1
0
1 2 3 4 5 6 7 8
9
10 11
NO OF COMPOSITE UNITS OF FACTORS OF PRODUCTION
LAW OF RETURN TO SCALE

DIS-ECONOMIES START OPERATING AS SCALE
OF ACTIVITY IS RAISED BEYOND A POINT.

OPTIMUM MIX OF INPUTS TO ACHIEVE THE
RESULT VARIES WITH THE DEGREE OF
RESULT DESIRED.

APPLICABLE IN LONG RUN.

CDR MUST ANALYSE THAT MARGINAL RETURN
IN TERMS OF RESULT NOT LESS THAN
MARGINAL INCREASE IN INPUT.
PRODUCTION POSSIBILITY ANALYSIS
• DETERMINES MAX RESULT POSSIBLE WITHIN
GIVEN RESOURCE ALLOCATION.
• ANALYSIS OF ONE INPUT – TWO OUTPUT CASE.
• DETERMINES MOST EFFICIENT COMBINATION
OF TWO FOR MAXIMISING RESULTS WITHIN
GIVEN ONE INPUT.
• TECHNIQUE MAKES USE OF PRODUCTION
POSSIBILITY CURVE.
PRODUCTION POSSIBILITY ANALYSIS
EXAMPLE
• ALLOCATED BUDGET – C CRORES.
• ACQUISITION OF OPTIMUM COMBINATION OF
OFFENSIVE POTENTIAL (OP) AND DEFENSIVE
POTENTIAL (DP).
• C CRORE – 400 OP OR 930 DP POSSIBLE.
• DEFENCE PLANNER FORMULATES PRODUCTION
POSSIBILITY SCHEDULE.
PRODUCTION POSSIBILITY SCHEDULE
(INPUT- DEFENCE RESOURCES OUTPUT -OP&DP)
COMBINATIONS POSSIBLE
POSSIBLE
COMBINATIONS
A
OFFENSIVE
POTENTIAL
DEFENSIVE
POTENTIAL
400
0
0
940
B
C
D
E
PRODUCTION POSSIBILITY SCHEDULE
(INPUT- DEFENCE RESOURCES OUTPUT -OP&DP)
COMBINATIONS POSSIBLE
POSSIBLE
COMBINATIONS
A
OFFENSIVE
POTENTIAL
400
DEFENSIVE
POTENTIAL
0
REAL SITUATION PRODUCTION POSSIBILITY
B CAN BE FORMULATED
300
SCHEDULE
BASED 520
ON COST
200 ANALYSIS AND
730 OR
BENEFITCANALYSIS, SYSTEM
D
100
870
E
0
940
PRODUCTION POSSIBILITY CURVE
PP CURVE FOR BUDGET C + X CRORES
COMBINATIONS ON PP
500
CURVE ARE THE UTMOST
THAT BUDGET CAN FETCH
E1
400
NON FEASIBLE
COMBINATION
I1
300
OFFENSIVE
POTENTIAL
E2
COMBINATIONS I 1 & I 2
200
NOT GETTING BEST
0
I2
EFFICIENCY
100
0
200
400
600
800
DEFENSIVE POTENTIAL
E3
OUT OF BUDGET
1000
1200
PRODUCTION POSSIBILITY CURVE
CONCAVE NATURE OF PP CURVE
500
MARGINAL RATE OF TRANSFORMATION:
(MRT) AMOUNT OF ONE OBJECT GIVEN
E1
400
E2
TO ACHIEVE EXTRA AMOUNT OF OTHER
E3
300
OFFENSIVE
POTENTIAL
MRT: INCREASES PROGRESSIVELY
BECAUSE RESOURCES LESS AND
LESS ADAPTABLE TO OTHER
200
E4
OBJECT IS DIVERTED.
100
0
0
200
400
600
800
DEFENSIVE POTENTIAL
1000
1200
PRODUCTION POSSIBILITY CURVE
ALL COMBINATIONS ON PP CURVE
500
EFFICIENT: WHICH TO CHOOSE?
E1
400
E2
E3
300
OFFENSIVE
POTENTIAL
200
E4
100
0
0
200
400
600
800
DEFENSIVE POTENTIAL
1000
1200
INDIFFERENCE CURVE
A
ALL POINTS YIELD EQUAL LEVEL OF
500
MILITARY UTILITY OR EFFECTIVENESS.
400
B
DECISION MAKER INDIFFERENT TO
CHOICES BETWEEN COMBINATIONS.
300
OFFENSIVE
POTENTIAL
C
200
D
IC1
100
0
0
200
400
600
800
DEFENSIVE POTENTIAL
1000
1200
INDIFFERENCE MAP
EACH CURVE REPRESENTS
IC 1
500
IC 2 IC 3
DIFFERENT LEVEL OF
EFFECTIVENESS.
400
OFFENSIVE
POTENTIAL
300
200
100
0
0
200
400
600
800
DEFENSIVE POTENTIAL
1000
1200
PRODUCTION POSSIBILITY CURVE WITH
INDIFFERENCE MAP SUPERIMPOSED
IC 1
500
E1
400
OFFENSIVE
POTENTIAL
IC 2 IC 3
N
E- POSSIBLE & OPTIMUM
E2
N-NON FEASIBLE
E
I
300
I-INEFFICIENT
E3
200
I
100
0
E4
E5
I
0
200
400
N
600
800
DEFENSIVE POTENTIAL
1000
1200
PRODUCTION POSSIBILITY CURVE WITH
INDIFFERENCE MAP SUPERIMPOSED
PP CURVE SHOWS ALL
COMBINATIONS UTMOST
IC 1
500
E1
400
OFFENSIVE
POTENTIAL
IC 2 IC 3
(EFFICIENCY) .
E2
INDIFFERENCE CURVE
SHOWS ALL COMBINATIONS
I
300
E
HAVING EQUAL LEVEL OF
E3
200
MILITARY UTILITY
E5
I
0
200
(EFFECTIVENESS) .
E4
I
100
0
THAT BUDGET CAN FETCH
400
600
800
DEFENSIVE POTENTIAL
1000
1200
INDIFFERNCE CURVE ANALYSIS
NATIONAL SECURITY VS DEVP
20
RATE 10
OF ECO
DEVP
POLICY FEASIBLE AREA
POLICY FEASIBILITY
0
CURVE BASED ON GDP
0 10 20 30 40 50 60 70 80 90
LEVEL OF SECURITY %
(TOTAL RESOURCES)
INDIFFERENCE CURVE
DEFENCE EXP VS DEVP
INDIFFERENCE
CURVES SHOWING
THE DEGREE TO
WHICH NATIONAL
INTERESTS ARE
MET
20
RATE 10
OF ECO
DEVP
0
IC5
IC3
IC2
IC1
0 10 20 30 40 50 60 70 80 90
LEVEL OF SECURITY %
IC 4
PRODUCTION POSSIBILITY CURVE WITH
INDIFFERENCE CURVE SUPERIMPOSED
DEFENCE EXP VS DEVP
E
20
RATE 10
OF ECO
DEVP
0
INDIFFERENCE
CURVES SHOWING
THE DEGREE TO
WHICH NATIONAL
INTERESTS ARE
MET
D
C
IC5
POLICY FEASIBLE AREA
A
IC2
IC1
IC3
B
0 10 20 30 40 50 60 70 80 90
LEVEL OF SECURITY %
IC 4
POLICY FEASIBILITY
CURVE BASED ON GDP
(TOTAL RESOURCES)
PRODUCTION POSSIBILITY CURVE
APPLICATIONS

A SQN OF TPT AIRCRAFT LIFTING MEN AND
MATERIAL.

AN ENGINEER COY CLEARING MINES AND
CONSTRUCTING DEFENCES.

A SET OF MACHINES PRODUCING TWO PRODUCTS.

FORCES USED NOW AND HELD IN RESERVE.
ALL SITUATIONS WHERE ONE RESOURCE CAN BE
USED FOR TWO PURPOSES
ISOQUANT CURVE
100
TWO COMBINATION OF INPUTS
GIVING SAME OUTPUT
80
MORE BOMBERS WITH SINGLE BOMBS
60
BOMBERS WITH TWO BOMBS
BOMBERS
LESSER NO OF BOMBERS
40
FLYING MORE SORTIES
20
10 TARGETS DESTRUCTION
0
0
20
40
60
BOMBS
80
100
ISOQUANT CURVES
IT IS POSSIBLE TO MOVE
DIFFERENT ISOQUANT FOR
TO HIGHER LEVEL OF
DIFFERENT
OUTPUTS
OUTPUT
BY INCREASING
ATLEAST ONE INPUT.
100
80
60
50 TARGETS
BOMBERS
40
40 TARGETS
30 TARGETS
20
20 TARGETS
10 TARGETS
0
0
20
40
60
BOMBS
80
100
ISOCOST LINE OR EXCHANGE CURVE
OR EQUAL COST LINE OR BUDGET LINE
100
VARIOUS COMBINATIONS OF
80
BOMBERS AND BOMBS THAT CAN
BE PROCURED IN GIVEN BUDGET
60
BOMBERS
X
40
20
0
0
20
40 Y 60
BOMBS
80
100 Y1
ISOQUANT & ISOCOSTCURVES
ISOCOST shows exchange/
100
subs between items keeping
budget constant (ECONOMY).
80
ISOQUANT shows exchange/ subs
between items keeping output
60
BOMBERS
constant (EFFECTIVENESS).
A
50 TARGETS
40
E
E1
20
40 TARGETS
30 TARGETS
20 TARGETS
10 TARGETS
0
0
20
40
D
60
BOMBS
80
100
B
ISOQUANT AND ISOCOST ANALYSIS
APPLICATIONS

SITUATIONS WHERE TWO PARTIALLY
SUBSTITUTABLE FACTORS PRODUCE SAME
OUTPUT.

EFFECTIVENESS IN A GIVEN BUDGET.

COMBINATION FOR A GIVEN BUDGET AND
EFFECTIVENESS.

BUDGET INCREASE REQUIRED FOR
ENHANCING EFECTIVENESS.

REDUCTION IN EFFECTIVENESS DUE TO
BUDGET CUT OR INCREASE IN PRICE.