👨🏻‍💻 Factor-Product Relation

• It deals with the production efficiency of resources.
• The rate at which the factors are transformed in to products is the study of this relationship.
• Optimization of production is the goal of this relationship.
• This relationship is known as input-output relationship by farm management specialists and fertilizer responsive curve by agronomists.
• Factor-Product relationship guides the producer in making the decision how much to produce?.
• This relationship helps the producer in the determination of optimum input to use and optimum output to produce.
• Price ratio is the choice indicator.
• This relationship is explained by the Law of Diminishing Returns.
• Algebraically, this relationship can be expressed as

Y = f (X₁ / X₂, X₃………………X_n)

Law of Diminishing Returns

• The factor - product relationship or the amount of a resource that should be used and consequently the amount of output that should be produced is directly related to the operation of law of diminishing returns.
• This law explains how the amount of product obtained changes as the amount of one of the resources is varied while the amount of other resources is fixed.
• It is also known as law of variable proportions or principle of added costs and added returns.

Definitions

An increase in capital and labour applied in the cultivation of land causes in general less than proportionate increase in the amount of produce raised, unless it happens to coincide with the improvements in the arts of agriculture (Marshall)

If the quantity of one of productive service is increased by equal increments, with the quantity of other resource services held constant, the increments to total product may increase at first but will decrease after certain point (Heady)

Limitations

• The law of diminishing returns fails to operate under certain situations. They are called limitations of the law.
• Improved methods of cultivation
• New soils and
• Insufficient capital

Why the law of diminishing returns operates in Agriculture

• The law of diminishing returns is applicable not only to agriculture but also manufacturing industries. This law is as universal as the law of life itself. If the industry is expanded too much and becomes unwidely, supervision will become difficult and the costs will go up. The law of diminishing returns, therefore set in.
• The only difference is that in agriculture it sets in earlier and in industry much later.
• There are several reasons for the operation of law of diminishing returns in agriculture. The reasons are:
  • Excessive dependence on weather.
  • Limited scope for mechanization.
  • Limited scope for division of labour.
  • Agriculture uses larger proportion of land resource.
  • Soil gets exhausted due to continuous cultivation.
  • Cultivation is extended to inferior lands.

Concept of Production

Total product (TP)

• Amount of product which results from different quantities of variable input. Total product indicates the technical efficiency of fixed resources.

Average Product (AP)

• It is the ratio of total product to the quantity of input used in producing that quantity of product.

Average Product (AP) = Output/Input = Y/X

• Where Y is total product and X is total input.
• Average product indicates the technical efficiency of variable input.

Marginal product (MP)

• Additional quantity of output resulting from an additional unit of input.

Marginal Product (MP) = (Additional Output)/(Additional Input) = ΔY/ΔX

Total Physical Product (TPP)

• Total product expressed in terms of physical units like kgs, quintals, tonnes is termed as total physical product.
• Similarly, if AP and MP are expressed in terms of physical units, they are called Average Physical Product (APP) and Marginal Physical Product (MPP).

Total Value Product (TVP)

• Expression of TPP in terms of monetary value, it is called Total Value Product.

TVP = TPP x Py or Y x Py

Average Value Product (AVP)

• The expression of Average Physical Product in money value.

AVP = APP x Py

Marginal Value Product (MVP)

• When MPP is expressed in terms of money value, it is called Marginal Value Product.

MVP = MPP x Py or ΔY/ΔX x Py

Production Function Curve

☘️ NABARD Mains 2020

👉🏻 These are the inference drawn from the Production-function Curve.

• All TPP, MPP and APP curves are inverted ‘U’ shaped.
• Total Physical Product of x (TPPx) rises at increasing rate of return, MPPx rising and Production function curve is concave upward.
• Beyond Inflexion Point ‘A’, TPPx rises but at diminishing rate and MPPx starts to decline.
• TPPx is highest at ‘B’ or remains constant and MPPx = 0.

👉🏻 Relationship between Total Product (TP) and Marginal Product (MP)

• When Total Product is increasing, the Marginal Product is positive.
• When Total Product remains constant, the Marginal Product is zero.
• When Total Product decreases, Marginal Product is negative.
• As long as Marginal Product increases, the Total Product increases at increases at increasing rate.
• When the Marginal Product remains constant, the Total Product increases at constant rate.
• When the Marginal Product declines, the Total Product increases at decreasing rate.
• When Marginal Product is zero, the Total Product is maximum.
• When marginal product is less than zero (negative), total physical product declines at increasing rate.

👉🏻 Relationship between Marginal and Average Product

• When Marginal Product is more than Average Product, Average Product increases.
• When Marginal Product is equal with the Average Product, Average Product is Maximum.
• When Marginal Product is less than Average Product, Average Product decreases but never becomes negative.

Elasticity of Production (Ep)

• It is a measure of responsiveness of output to changes in input.
• The elasticity of production refers to the proportionate change in output as compared to proportionate change in input.
  • Ep = (Percentage change in output)/(Percentage change in input)
  • Ep = ((change in output / initial output)*100) / ((change in input / initial input)*100)
  • i.e., ((∆ Y/Y)*100)/(( ∆ X/X)*100)
  • = (∆ Y/Y) / (∆ X/X) = (∆ Y/Y)*(X/∆ X) = (∆ Y/∆ X) * (X/Y)
• By rearranging we have,

Ep = MPP/APP

• The elasticity of production is the ratio of Marginal Physical Product to Average Physical Product.
  • Ep = 1, Constant Returns. Ep is one at MPP = APP (At the end of I stage)
  • Ep > 1, Increasing Returns (I Stage of Production)
  • Ep < 1, Diminishing Returns (II Stage of Production)
  • Ep = 0, When MPP is zero or TPP is Maximum (At the end of II stage)
  • Ep < 0, Negative Returns (III Stage of Production)

Three Regions of Production Function

• The production function showing total, average and marginal product can be divided into three regions, stages or zones in such a manner that one can locate the zone of production function in which the production decisions are rational.
• The three sages are shown in the figure.

First Stage or I Region or Zone I

• The first stage of production starts from the origin i.e., zero input level.
• In this zone, Marginal Physical Product is more than Average Physical Product and hence Average Physical Product increases throughout this zone.
• Marginal Physical Product (MPP) is increasing up to the point of inflection and then declines.
• Since the Marginal Physical Product increases up to the point of inflection, the Total Physical Product (TPP) increases at increasing rate.
• After the point of inflection, the Total Physical Product increases at decreasing rate.
• Elasticity of production is greater than unity up to maximum Average Physical Product (APP).
• Elasticity of production is one at the end of the zone (MPP = APP).
• In this zone fixed resources are in abundant quantity relative to variable resources.
• The technical efficiency of variable resource is increasing throughout this zone as indicated by Average Physical Product.
• The technical efficiency of fixed resource is also increasing as reflected by the increasing Total Physical Product.
• Marginal Value Product is more than Marginal Factor Cost (MVP > MFC)
• Marginal revenue is more than marginal cost (MR > MC)
• This is irrational or sub-optimal zone of production.
• This zone ends at the point where MPP = APP or where APP is Maximum.

Second Stage or II Region or Zone II

• The second zone starts from where the technical efficiency of variable resource is maximum i.e., APP is Maximum (MPP=APP)
• In this zone Marginal Physical Product is less than Average Physical Product. Therefore, the APP decreases throughout this zone.
• Marginal Physical Product is decreasing throughout this zone.
• As the MPP declines, the Total Physical Product increases but at decreasing rate.
• Elasticity of production is less than one between maximum APP and maximum TPP.
• Elasticity of production is zero at the end of this zone.
• In this zone variable resource is more relative to fixed factors.
• The technical efficiency of variable resource is declining as indicated by declining APP.
• The technical efficiency of fixed resource is increasing as reflected by increasing TPP.
• Marginal Value Product is equal to Marginal Factor Cost (MVP = MFC).
• Marginal Revenue is equal to Marginal Cost (MR = MC)
• This is rational zone of production in which the producer should operate to attain his objective of profit maximization.
• This zone ends at the point where Total Physical Product is maximum or Marginal Physical Product is zero.

Third Stage or III Region or Zone III

• This zone starts from where the technical efficiency of fixed resource is maximum (TPP is Max).
• Average Physical Product is declining but remains positive.
• Marginal Physical Product becomes negative.
• The Total Physical Product declines at faster rate since MPP is negative.
• Elasticity of production is less than zero (Ep < 0)
• In this zone variable resource is in excess capacity.
• The technical efficiency of variable resource is decreasing as reflected by declining APP.
• The technical efficiency of fixed resource is also decreasing as indicated by declining TPP.
• Marginal Value Product is less than Marginal Factor Cost (MVP < MFC)
• Marginal Revenue is less than Marginal Cost (MR < MC)
• This zone is irrational or supra-optimal zone.
• Producer should never operate in this zone even if the resources are available at free of cost.

Three Regions of Production-Economic decisions

Stage I

• It is called irrational zone of production. Any level of resource use falling in this region is uneconomical.
• The technical efficiency of variable resource is increasing throughout the zone (APP is increasing).
• Therefore, it is not reasonable to stop using an input when its efficiency is increasing.
• In this zone, more products can be obtained from the same resource by reorganizing the combination of fixed and variable inputs. For this reason, it is called irrational zone of production.

Stage II

• It is rational zone of production. Within the boundaries of this region is the area of economic relevance.
• Optimum point must be somewhere in this rational zone.
• It can, however, be located only when input and output prices are known.

Stage III

• It is also an area of irrational production.
• TPP is decreasing at increasing rate and MPP is negative.
• Since the additional quantities of resource reduces the total output, it is not profitable zone even if the additional quantities of resources are available at free of cost.
• In case if a farmer operates in this zone, he will incur double loss, i.e.,
  • Reduced Production
  • Unnecessary additional Cost of inputs.