(A) Fixed and Variable factors:
In the act of production a firm uses a variety of goods and services
called factors of production or inputs. These factors and services
include plant and machinery, factory premises, tools and equipment,
land, raw materials, labor etc. Some of these factors are fixed in
size. A machine or manager has to be employed in its full capacity,
irrespective of the volume of the output. Other factors like labor and
raw materials can be employed in small or large units according to the varying quantity of output. These are variable factors of production. Fixed factors are indivisible while variable factors are divisible into small units. Fixed factors are supplementary in nature. Machines make productive activity more convenient and efficient. However, even in their absence, output of some volume can be produced. Variable factors are called prime factors without which no output can be produced.
The distinction between the two types of factors is the basis of cost analysis and
the law of returns. If all the factors of production were perfectly
divisible and variable, the cost of production would have increased in
the exact proportion of the output. As this is not the case, a special
cost analysis becomes important. The classification of costs can be
summarized as follows:
Fixed Cost
|
Variable Cost
|
Indivisible large units | Divisible small units |
Supplementary: Even in their absence some amount of production can be carried out. |
Without these factors no production can be carried out. |
Plant, machinery, manager, land, factory premises etc. |
Labor, raw materials, transport, freight etc. |
(B) Total and Marginal Output: In the act of
production, a progressive increase in the input results in a similar
increase in the output. There is a significant difference in the
composition of input and its effect on the output. In the short run,
the total employment of fixed factors of production remains constant as
regards quantity and quality. Fixed inputs are lumpy in the sense they
are to be employed in a single big unit that may be available. Let us
assume that machines, factory premises and the manager together make up
for a lumpy unit of fixed factors. So long as variable factors are not
employed no output can be produced. Since variable factors are
divisible into small units, they can be employed and increased in small
doses. Let us assume one worker and a small quantity of raw materials
together form a variable input unit. With every increase in the
variable unit, output will increase simultaneously. This increase will
appear in the total output. Such an increase in the total output is not
exactly proportional. Every additional variable unit may make a
different contribution to the firm’s total output. Such additions, of
individual variable units, are called the marginal product. It
is important to note that the marginal product is essentially an outcome
of the functioning of variable input units. This is because fixed
inputs are not themselves capable of producing any output. In this
sense fixed inputs are ’supplementary’ while variable units are ’prime’
in their contributions. This can be illustrated with the help of a
numerical example. The entire process of productive activity in the
example is subject to the law of variable returns.
(C) Production Function and the Law of Returns: The relation between input and output is called the production function:
Q = f (L, K)
It states that the output produced (Q) is functionally dependent on
the units of input: labor (L) and capital (K). Though in the
simplified form of the function, only two inputs have been shown, the
relation can be extended to a range of input quantities and qualities.
Labor (L) in general symbolizes all types of human services utilized in
productive activity. Similarly capital (K) symbolizes different types
of material or physical agents of production.
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