Agriculture Production Economics
PRODUCT-FACTOR RELATIONSHIP
PRODUCTION FUNCTION
“It is the technical & mathematical relationship
describing the manner & the extent to which
a particular products depends upon the
quantities of inputs or services of inputs used
at a given level of technology & in a given
period of time”
 I. It is a technical relation.
 The engineer sees that the various combinations of inputs are
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applied and the output resulting from them by using a particular
process of production. There are many processes of production and
for each process there is a relationship between various
combinations of inputs and resulting output.
2- It has economic importance.
Production function has got an economic importance for the
entrepreneurs. It helps the entrepreneurs to minimize the output
form a given combination of inputs.
3. Production functions differ from firm to firm:
Each firm has its own production function. This production function
is determined by the state of technology. If the state of technology
changes the old production function is disturbed.
Assumptions of production
function
 1. It is associated with specified period of
time.
 2. The state of technology is constant during
the period of time.
 3. The producer is expected to use the best
and the most efficient technique.
 4. The factors of production are divisible.
Cont…
 Total physical product:
 Total amount of output obtained by using different
units of inputs.
 TPP increases, tech.efficiency of fixed resources also
increases.
 Average physical product:
 Avg. amount of output produced by each
corresponding units of input.
 APP increases, tech.efficiency of variable resources
also increases.
 APP= TPP/ INPUT LEVEL orY/X
Cont…
 Marginal physical product:
 Additional amount of output added by an additional
unit of input.
 Change in output as a result of change in variable
input.
 MPP = Change in TPP/ Change in input
level.
 MPP = DELTAY / DELTA X
ELASTICITY OF PRODUCTION
 %-age change in output / %-age change
input.
 Denoted by Ep.
 Ep = MPP/APP.
RELATIONSHIP B/W TPP, MPP & AAP
 As long as MPP is increasing, TPP is
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increasing at an increasing rate till the point
of MPPmax.
After that point TPP increases at a decreasing
rate.
When MPP=0, Then TPP=Maximum.
-ve MPP results in decreasing TPP.
+ve MPP results in increasing TPP.
STAGES OF PRODUCTION FUNCTION
 Production function can be divided into 3
stages.
 Stage I
 Stage II
 Stage III
STAGES OF PRODUCTION FUNCTION
 STAGE-I
 Starting point = Origin
 Ending point = MPP = APP
 TPP increases at increasing rate upto the
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point of inflection.
APP is increasing throughout this stage.
MPP increases upto the point of inflection.
MPP>APP
EP > 1 (Throughout this stage)
CONT…
 EP = 1 (At the end of this stage)
 Tech. efficiency of variable & fixed resources
increases.
 Fixed resources are abudant.
STAGES OF PRODUCTION FUNCTION
 STAGE-II
 Starting point = APP max
 Ending point => MPP = 0
 MPP < APP but both exhibit declining trend.
 TPP increases at decreasing rate.
 EP < 1 (Throughout this stage)
STAGES OF PRODUCTION FUNCTION
 EP = 0 (At the end of this stage)
 Tech. efficiency of variable resources
decreases but of the fixed resource increase.
 Variable resources are abudant.
STAGES OF PRODUCTION FUNCTION
 STAGE-III
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Starting point => MPP = 0 or TPP = Max.
TPP decreases at increasing rate.
APP decreases throughout this stage.
MPP becomes –ve.
EP < 0.
Tech. efficiency of variable resources & fixed
resource decreases.
 Variable resources is in excess capacity.
OPTIMUM LEVEL OF INPUT
 MVP OF INPUT:
 Additional income received from using an
additional unit of input.
 MVP = Change in the total value product / Change
in input level.
Or
 MVP = DELTA TR / DELTA X
Cont…
 MIC:
 Change in the total input cost by using an additional unit of
input.
 Price per unit of input.
 MIC = Change in the total value product / Change in input
level.
Or

MIC = DELTA TC / DELTA X
DETERMINATION OF OPTIMUM LEVEL OF INPUT
INPUT LEVEL
TPP
MPP
TVP
MVP
MIC
1
15
-
75
115
3O
2
38
-
190
-
3O
3
66
-
330
-
30
4
96
-
480
-
30
5
120
-
600
-
30
*6
126
-
630
-
30
7
126
-
630
-
30
OPTIMUM LEVEL OF OUTPUT
INPUT
LEVEL
TPP
1
MPP
TR
MR
MC
15
75
5
INPUT COST /
MPP
2
38
190
5
3
66
330
5
4
96
480
5
5
120
600
5
6
126*
630
5
7
126
630
5