Unit 3 solved question and answers PDF

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Unit 3: ProductionMiscellaneousProduction: Production is a process of transforming inputs into outputs. In other words it refers to the production of goods and services.Production Function: Production function shows the relationship between factors of input and output under a given technology.Accord...

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Unit 3: Production Miscellaneous Production: Production is a process of transforming inputs into outputs. In other words it refers to the production of goods and services. Production Function: Production function shows the relationship between factors of input and output under a given technology. According to Watson, “Production function is the relationship between physical inputs and physical outputs of a firm.” Production function can be written as

Q = f (N,K,L,O.........) Where, Q= Output N=Land K=Capital L=Labour O=Organization Production is a function of land, labour, capital and organisation.

Q1. Explain the law of variable proportions with the help of table and diagram. Ans: Introduction: Law of variable proportion explains the relationship between proportion of fixed input and variable input on one hand and output on the other. In other words, law of variable proportions helps us to understand what shall happen to output when we keep some factors of production fixed and when we shall vary only one factor of production. It is in fact modern form of diminishing returns. It applies for a short period. Assumptions: 1. Technology is assumed to remain constant. 2. There must be some inputs whose quantities remain constant. 3. It is possible to change the factor of production. 4. All the units of factors of production are equally efficient. 5. Factors of production are not perfect substitutes. There are 3 stages of law of variable proportions; i) ii) iii)

First Stage: Increasing Returns Second Stage: Diminishing Returns Third stage: Negative Returns The law of variable proportion can be explained with the help of the following table.

Table:

In the table above, keeping land, capital constant, we have varied only one factor of production that is labour. Here we observe 3 stages: Initially the total product increases at increasing rate, Then total product starts increasing at a diminishing rate reaches before finally reaching its highest point. Finally the total product starts declining. The 3 stages can be explained in detail with the help of the following diagram:

In the above diagram on OX axis we have amount of variable factor. On OY axis we have TP,MP and AP The 3 stages can be explained as follows: First Stage or increasing returns: Initially, when the firm is just established, the fixed factors will be more than that of variable factors. Initially the first stage is characterized by underutilization of resources. As one variable factor is increased while keeping fixed factors constant, then there is more efficient use of available fixed factors. This shall result in marginal product increasing at increasing rate Due to this in the first stage, the total product shall increase at increasing rate. Second Stage or Diminishing returns: As the one variable factor is gradually increased, the fived factors will be more effectively utilized.

Gradually the marginal product shall increase at diminishing rate because one factor of production is not perfect substitute of the other. Due to which The total product although increasing shall increase at a diminishing rate. Finally by the end of this stage Total product shall reach its highest point reflecting optimum utilization of resources in this stage. Third Stage or Negative returns: In the third stage as the one variable factor of production is increased keeping the fixed factor of production constant, there is overutilization of fixed factors of production due to which the Marginal Product shall become negative. As and when Marginal product becomes negative, the Total product starts declining. Importance of law of variable proportions: 1.The law of variable proportion helps us to understand precisely the process of production. The input output relation of the firm is properly explained by the law for a firm in short run. 2. The law helps the firm to predict the point where in its total product shall reach its highest point and achieve optimum utilisation of resources. 3. The law indirectly implies that a firm can stall the occurrence of third stage by introducing advanced technology in the second stage. Conclusion: Law of variable proportion is a very relevant law which helps the firms to take appropriate decisions in short run so as to maximise their profits.

Q2. Explain the law of returns to scale in the long run with the help of table and diagram. Ans: Law of Returns to scale tries to study the behaviour of the firm in long run. The law of returns to scale tries to study the relationship between input and output. That is to say that it tries to explain as to how the output shall vary for a given proportionate change in input in the long run. Long Run is basically a time period in which all the factors of production are variable. The production function in the long run can be explained with the help of the following equation: Q=f(x1,x2,x3.......etc) Here Q= level of output being produced in the long run. f= functional relationship x1,x2,x3.......etc= various factors of production being employed in the long run. Law of Returns to scale can be explained with the help of the following table and diagram: Table:

A

In the above table, we basically see the relationship between the given changes in output for a given proportionate change in input. In the table we can also observe that all the factors of production being taken onto consideration that is labour and capital are variable. From the table we can clearly observe 3 stages namely: 1. Increasing Returns to Scale 2. Constant Returns to scale

3. Diminishing Returns to scale. The three stages can be clearly explained with the help of the diagram below as follows:

In the above diagram, On the OX axis we have Scale of input. On the OY axis we have Marginal Product. IRCD in the diagram represents the marginal product. The three stages can be explained as follows: Stage 1: Increasing Returns to scale Increasing returns to Scale is the first stage in the law of Returns to scale. Here as the input is increased in the given proportion the, the output shall increase more than proportionately. This happens because in this case Economies of scale shall be more than the diseconomies of scale. For Example: If input is increased by 100 percent then, the output shall increase by more than 100 percent.

In the diagram it is represented by the slope IR. Stage 2: Constant Returns to Scale Constant Returns to scale is the second stage of Law of returns to scale. Here as input is increased in the given proportion then, the output shall also increase by the same proportion. This happens because in this case the economies of scale shall be equal; to the diseconomies of scale. For Example: If input is increased by 100 percent then, the output shall also increase by the same 100 percent. In the diagram above the same is represented by line segment RC. Stage 3: Diminishing Returns to Scale Diminishing Returns to scale is the third stage of Law of Returns to scale. Here as input is increased in the given proportion then, the output shall also increase but less than proportionately. This happens because in this case the economies of scale shall be less than the diseconomies of scale. For Example: If input is increased by 100 percent then, the output shall also increase by less than 100 percent. In the diagram above the same is represented by line segment CD.

Thus these are the 3 stages in the law of returns to scale. The three stages happen in the long run due to the variations between the economies and the diseconomies of scale. Conclusion: The law of Returns to scale is a very important theory in the long run which not only helps us to understand as to how a firm behaves in the long run but it shall also help us to understand as to how the output shall vary when the input is varied in a given proportion in the long run.

Q3. Briefly explain the economies of scale. Or Briefly explain the differences between internal and external economies Or Briefly explain internal and external diseconomies of scale

Ans: Economies of scale basically refer to the advantages which a firm accrues. Economies of scale can be further classified into: A. Internal Economies: Internal economies refer to the advantages that the firm accrues because it is in the process of expansion or growth. The firm itself is responsible for internal economies. The internal economies can be classified as under: (MTM FRST) 1. Managerial economies: An expanding firm will be seeing its profits grow exponentially. Hence an expanding firm will be in opposition to hire talented managers, These talented managers shall increase the profits of the firm even further. The advantages that a firm gets by hiring talented managers refer to managerial economies. 2. Technical Economies: An expanding firm will be having more capital. So it will incorporate advanced technology in the process of production. This shall create more demand for a firm’s product which is technologically more advanced. The advantages that a firm gets by incorporating advanced technology refer to technical economies.

3 Marketing Economies: An expanding firm will also have great brand value, hence compared to a new firm it need not spend hefty amount on money on advertisement. This advantage of the expanding firm which enjoys due to its brand value is known as Marketing Economies. 4. Financial Economies: An expanding firm due to its brand value and capital base shall be having a great deal of credit worthiness. By leveraging its creditworthiness and brand value an expanding firm can raise funds from money and capital market at relatively low rate of interest. This advantage of the firm is known as financial economies. 5. Risk Bearing Economies: An expanding large company shall be having many lines of production. Now, due to which even if the firm suffers losses from one line of production, the same losses can be offset by the other line of production. This advantage that the firm enjoys is called Risk bearing economies. 6. Transport economies: An expanding large company can reduce its cost of production by transporting its inventories, raw materials and finished products by its own fleet of vehicles. This advantage that the firm gets is called as the Transportation Economies. 7. Storage economies: An expanding large company can reduce its cost of production by storing its inventories, raw materials and finished products in its own ware houses. This advantage that the firm gets is called as the Storage Economies.

B. External Economies: External economies refer to the advantages that the firm accrues because of the expansion and consolidation of Industry in a particular region. This advantage is enjoyed by all the firms which are present in the industry. The external economies can be classified as under: (TC DG BD)

1. Technical External Economies: In a very well established industry tall the firms shall be having access to state of the art technology. This is known as the technical external economies. 2. Cheaper Raw Material and capital: When an industry is expanding, then the firms in the industry will be having access to the raw material and capital at a cheaper rate because in the initial stages of expansion there is under utilisation of resources. 3. Developed Skill labour: Firms which are established in already expanding industry can have easy access to developed skill labour. For example in Bangalore which is also known as Silicon Valley of India, software companies can easily find talented software engineers for hiring. 4. Growth of Ancillary Industries: When one industry expands in a particular region, then it shall also provide the necessary environment for the growth and development of ancillary industry. This shall not only provide employment opportunities to other people but it shall also boost the growth of core industry as well. 5. Better Transport and marketing infrastructure: When a industry is expanding and being consolidated in a given region even the govt. Will promote the industry’s growth by further developing better transportation and infrastructure facilities. 6. Devolving of information: When a industry is expanding and consolidating it will be easy for a new firm to get all the required information to enter the industry.

Diseconomies of scale basically refer to the disadvantages which a firm accrues. Diseconomies of scale can be further classified into: A. Internal Diseconomies: Internal diseconomies refer to the disadvantages that the firm accrues because it is in the process of overexpansion. The firm itself is responsible for internal diseconomies. The internal diseconomies can be classified as under: (CCCIP R)

1. Lack of coordination: As a firm over expands it becomes more and more difficult for the higher management of the firm to coordinate the firm. This shall eventually lead to production inefficiencies. 2. Lack of Control: As a firm over expands it becomes quite difficult to control the various production lines of the firm. This will further increase the inefficiencies of the firm. 3. Lack of Proper Communication: As a firm over expands it becomes highly difficult for the higher-level of management to properly understand the problem and grievances of workers. This shall further increase the inefficiencies of the firm. 4. Lack of identification: An over expanded firm shall have a very wide labour base. When a labourer is working as a part of huge workforce, then he just becomes a serial number....a mere cog in the wheel...... this shall result in emotional disconnect and a feeling of isolation among workers. This shall further reduce the efficiencies of workers. 5. Risk bearing Diseconomies: When firm over expands huge loss in one line of production may not be offset by profits in the other lines of production.

External Diseconomies: External diseconomies refer to the disadvantages that the firm accrues because the industry has over expanded. These disadvantages are suffered by all the firms in the industry since they are part of the industry which has over expanded. The external diseconomies are as follows: (PT FR) 1. Pollution: As the industry over expands, it also highly pollutes the environment. This in turn shall adversely affect the health of workers which in turn shall reduce the efficiency of the entire industry. 2. Excessive Pressure on Transportation: Over expansions of industry shall inevitably put huge pressure on transportation due to traffic and

congestion. This in turn shall not only increase time delays but shall also reduce the efficiency of the entire industry. 3. Funds shortage: As Industry over Expands large firms find it extremely hard to raise funds. As the demand for capital shall be high, the cost of capital shall increase which in turn shall rise the price of products reducing the growth of industry. 4. Rise in the prices of the factors of production: As the industry over expands, then the demand for the factors of production shall also increase, this in turn shall rise the factors price as well as the cost of production........which reduces the profits of Industry.

Conclusion: Economies and diseconomies of scale play a vital role in determining the stages of laws of returns to scale.

Q4. Write the properties of factors of production. (in syllabus) Miscellaneous Questions Explain the functions of Entrepreneur Explain the importance and limitations of division of labour. Ans: In economic terms factors of production can be defined as inputs that are used for the production of goods or services with the aim to make economic profit. The factors, of production are the resources that include land, labor, capital, and enterprise. 1. Land: In literary sense, land is regarded as soil. However, in economics, land, a factor of production, has a much wider scope. Marshall has defined land as, “the materials and the forces which nature gives freely for man’s aid, in land and water, in air and light and heat.” Land refers to a natural resource that can be utilized to produce income. It is a useful factor of production, but is available in limited quantity. Certain facts about land are as follows: i. Perceived as a gift of nature to man. ii. Considered to be available in fixed quantity; therefore, does not have a supply price. This implies that the change in price of land does not affect its supply. iii. Regarded as a permanent input having certain inherent properties, which are original and indestructible. iv. Considered as an immobile factor of production. v. Considered to have infinite variation in terms of fertility. This leads to variation in the prices of land. 2. Labor: Labor constitutes one of the important factors of production. This factor involves human services and efforts for the production of goods or services.

Labor is commonly thought of a group of unskilled labor working in factories. However, in economic terms, a work, physical or mental, carried out for monetary purpose is called labor. Some of the peculiarities of labor are as follows: i. Labor cannot be separated from laborer. This is because laborer needs to sell his/her labor. ii. Labor is defined as the perishable factor of production that has no reserve price. iii. Labor is considered as the weakest commodity in terms of bargaining power. iv. Change in the price of labor would affect the supply of labor. In case of other commodities, supply rises with the rise in prices. In case of labor, supply of labor decreases with an increase in prices (wages) and vice versa. For example, if the wage of a worker reduces, then other family members of worker start working to meet up the requirements of their family. v. Adjustments in supply and demand of labor is difficult because it is difficult to increase or decrease labor instantly. Production is organized on the basis of division of labor. Let us discuss about division of labor in detail. Division of Labor: Adam Smith- the father of economics laid a greater emphasis on the concept of division of labor in his book, “An Inquiry into the Mature and Causes of the Wealth of Nations” in 1776. He stated that division of labor plays a vital role in increasing the productivity of labor. According to him, division of labor is the dynamic instrument for economic growth and development. There are different types of division of labor, which are explained as follows: i. Simple Division of Labor: Refers to the division of labor on the basis of their skills and occupations, such as carpenters and blacksmith. It is also referred as functional division of labor. ii. Complex Division of Labor: Refers to the division of labor on the basis of business processes and subprocesses. For example, most of the organizations have different names for their

processes, such as marketing process, manufacturing process, and distribution process. These processes are delegated to different groups of labor depending on their skills and abilities. iii. Territorial Division of Labor: Refers to the division of labor on the basis of geographical locations. In this type of division of labor, the processes are performed by specific cities or towns that are specialized in it. For example, in India, Kashmir is famous for its carpets and shawls, whereas Punjab is popular for agriculture. Advantages and Disadvantages of Division of Labor: Division of labor is useful for an organization in many ways. Some of the advantages of division of labor are as follows: i. Increasing Productivity: Refers to one of the main advantage of division of labor. Some processes of an organization are so long, thus, cannot be completed by a single worker or he/she would require more time to complete those processes. Consequently, the productivity of the organization would be affected. If the process is divided among a number of workers, they would be able to perform it efficiency and in less duration of time. ii. Increasing Dexterity and Skills: Implies that repetitive working on the same process makes workers expert of that process, which leads to reduction in errors. iii. Facilitating Inventions: Implies that division of labor leads to innovation of ...