Important Questions For NCERT Class 12 Economics Production Function and Returns to Factor

Please refer to Economics Production Function and Returns to Factor Class 12 Economics Notes and important questions below. The Class 12 Economics Chapter wise notes have been prepared based on the latest syllabus issued for the current academic year by CBSE. Students should revise these notes and go through important Class 12 Economics examination questions given below to obtain better marks in exams

Production Function and Returns to Factor Class 12 Economics Notes and Questions

The below Class 12 Production Function and Returns to Factor notes have been designed by expert Economics teachers. These will help you a lot to understand all important topics given in your NCERT Class 12 Economics textbook.

Output= f(Input)

Production is the process of transformation of input into output. In other words, it is an act of creating utility.

Production Function
The functional relationship between physical inputs and physical output is called production function. In other words, it is the process of getting maximum output from the given combination of inputs.

Question. What do you mean by fixed factor and variable factor?
Ans. Fixed Factors: Those factors which can’t be changed according to change in output level.
Variable Factors: Those factors which can be changed according to change in output level.

Question. Discuss the relationship between nature of supply and time period?
Ans. Very Short Period/ Market Period: It is the time period when all factor inputs are fixed and no inputs are fixed and no factor is variable. Thus, producer can’t change the supply. Thus, supply will be Perfectly Inelastic.

Short Period: It is the time period when at least one factor input is fixed and others are variable. Thus, producer can change the supply upto some extent only by changing variable inputs. So, supply will be Relatively Elastic.

Long Period: It is the time period when all factor inputs are variable. Thus, producer can change the supply upto large extent by changing any factor input. So, supply will be Highly Elastic.

Short Run Production Function
Output= f(Input)
Q=f(L, K)

L= Labour(variable)
K= Capital(fixed)

Question. Define Total Product (TP), Average Product (AP) and Marginal Product (MP).
Ans. Total Product/Total Physical Product refers to total quantity of a product produced by a firm
from given inputs and within given time period.
                                  TP=ΣMP
Average Product/Average Physical Product refers to output produced by per variable input.
                                𝐴𝑃 = 𝑇𝑃/𝐿

Marginal Product/Marginal Physical Product refers to addition in the total product by employing one more unit of variable input.
                                       MP= TP_n-TP_n-1

Question. Explain the relationship between Total Product, Average Product and Marginal Product with the help of schedule and diagram.
Ans.

Relationship between Total Product and Marginal Product
1. When Marginal Product increases, Total Product increases at increasing rate. (in the table it is shown from 1-4 units of labour)
2. When Marginal Product decreases, Total Product increases at diminishing rate. (in the table it is shown from 5-7 units of labour)
3. When Marginal Product becomes zero, Total Product will be maximum and constant. (it is shown by 8th unit of labour in the table)
4. When Marginal Product becomes negative, Total Product starts decreasing. (it is shown by the 9th unit of labour in the table)

Relationship between Average Product and Marginal Product
1. As long as Marginal Product is greater than Average Product, then Average Product increases. (it is shown from 1-4 units of labour in the table)
2. When Marginal Product is equal to Average Product, then Average Product will be maximum and constant. (it is shown by 5th unit of labour)
3. As long as Marginal Product is less than Average Product, then Average Product decreases. (it is shown by 6-9 units of labour)

Question. Explain the Law of Variable Proportion using schedule and diagram.
Ans. This law explains that when units of variable factor is increased keeping factors constant in the short run, initially Total Product increases at increasing rate, then increases at decreasing rate and finally starts falling. It is also called Law of Returns to Factor.

This law is based on the following assumptions: –
1. It is a short run concept where labour is variable factor and capital is fixed factor.
2. All the units of labour are homogenous, i.e. equally efficient.
3. There is no change in technology.
4. Proportion between factor inputs keep on changing

It is explained with the help of schedule and diagram: –

This law has following three stages: –
I. Increasing Returns to Factor
In this stage Marginal Product of variable input increases, i.e. Total Product increases at increasing rate.
This stage starts from origin till the maximum level of Marginal Product (Point of Inflection). It is due to better utilisation of fixed factor and distribution of labour.
II. Diminishing Returns to Factor
In this stage Marginal Product of variable input decreases, i.e. Total Product increases at decreasing rate.
This stage starts from the point where marginal product is maximum till the where marginal product is zero (Total Product is maximum). It is due to over-utilization of fixed factor and lack of substitution between the variable factor.
III. Negative Returns to Factor
In this stage, Marginal Product of variable input become negative, i.e. Total Product diminishes.
This stage starts from the point where Marginal Product is zero till the negative range of MP curve. It is due to poor co-ordination between fixed and variable factors.

Stage of Operation
A rational producer will always seek to operate in Stage II of Law of Variable Proportions.
• In Stage I, employment of every additional unit of variable factor gives more and more output i.e. marginal product increases. It means, there is scope for more profits, if production is increased with more units of variable factor.
• In Stage III, marginal product of each variable factor is negative. So, this stage is ruled out on the ground of technical efficiency and rational producer will never produce in the third stage.

This brings us to the conclusion that a producer will aim to operate in Stage II, as TP is maximum and MP of each variable factor is positive.

Question. Explain the causes for three stages of law of variable proportion.
Ans. Causes for Increasing Returns to Factor are: –

1. Better Utilization of Fixed Factor: Initially fixed factor employed is too high but variable input is very less. So, there is under utilisation of fixed factor. Thus, when variable inputs are increasing, there will be better utilization of fixed factor. Thus, output increases at increasing rate.
2. Division of Labour and Specialization: With increase in units of variable input, there will be better co-ordination between fixed and variable factor and division of work makes a worker specialized in a particular activity. So, it increases Marginal Product.

Causes for Diminishing Returns to Factor: –
1. Use of Fixed Factor beyond its optimum capacity: With increase in the units of variable input combined with fixed factor, there will be optimum utilization of fixed factor but after that fixed factor is over utilized in proportion to variable factor employed with it which leads to diminishing returns to factor.
2. Lack of substitution between the factors: Another reason for diminishing returns to factor is imperfect substitution between the factors.
There is a level to the extent of which one factor can be substituted by another. Example, more labour can be employed in place of capital. But beyond the certain limit, it is impossible to substitute one factor for another which results diminishing returns.

Causes for Negative Returns to Factor: –
1. Poor co-ordination between fixed and variable factor: With continuous increase in variable input, there will be excessive use of fixed factor and they will obstruct each other. So, poor co-ordination between fixed and variable factor results negative returns to factor.
2. Inefficiency of variable factor: As a result of excess increase in variable input, efficiency of variable input decreases. As a result, output falls.

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