____________________________________________________________________________________________________ 
                    Subject               COMMERCE 
                   Paper No and Title     2. Managerial Economics  
                   Module No and Title    13. Theory of Production: Law of Diminishing Returns 
                   Module Tag             COM_P2_M13 
                                                                                                          
                                              
        COMMERCE                     PAPER No. 2: Managerial Economics 
                                     MODULE No.13 : Theory of Production: Law of Diminishing Returns 
                   
                                          
    ____________________________________________________________________________________________________ 
             
            TABLE OF CONTENTS  
            1.  Learning Outcomes 
            2.  Introduction 
            3.  Some Basic Concepts of Production Theory 
            4.  Production Function 
            5.  Production Function with One Variable Input 
              5.1. Relationship between TP , AP  and MP  Curves 
                                L  L     L
            6.  The Law of Variable Proportions or Diminishing Marginal Returns 
              6.1. Assumptions 
              6.2. Stages of Production 
            7.  Summary  
             
                                                               
                 
             
             
             
             
             
             
             
             
             
             
             
     COMMERCE            PAPER No. 2: Managerial Economics 
                         MODULE No.13 : Theory of Production: Law of Diminishing Returns 
             
                                                                                 
       ____________________________________________________________________________________________________ 
                        
                        
                       1.  Learning Outcomes 
                       After studying this module, you would be able to 
                               Know about the Production Function. 
                               Derive the relationship between AP, MP& TP 
                               Learn about the Law of Variable Proportions. 
                               Learn about Stages of Production. 
                                                           
          COMMERCE                              PAPER No. 2: Managerial Economics 
                                                MODULE No.13 : Theory of Production: Law of Diminishing Returns 
                        
                                  
   ____________________________________________________________________________________________________ 
           
          2. Introduction 
          Today, one of the key concerns of the business managers is to achieve optimum efficiency in 
          production or minimizing cost for a given output. In competitive market, a firm can survive only if 
          it is able to produce goods and services at a competitive cost. Hence, business managers should 
          make an effort to minimize the cost of production or maximize output for  a given level of inputs. 
          There are some basic questions which managers are confronted with while endeavoring to minimize 
          the production cost. These are: 
           1.  How does output change with the increase in quantity of inputs? 
           2.  How can production be optimized to achieve reduction in cost? 
           3.  How does technology helps in minimizing the cost of production? 
           4.  How to achieve the least cost combination of inputs for a given output? 
          The theory of production seeks to explain answer to these questions with the help of economic 
          models that are built under hypothetical conditions. The production theory provides various tools 
          and methods to analyze relationship between input and output which provide directions to find 
          solutions to practical business problems.  
          3.  Some Basic Concepts Of Production Theory 
           Production 
           
          In economics, the transformation of resources (men, material, time and so on) into a different & 
          more useful commodity through a process is called production. In general, the production function 
          is limited to only ‘manufacturing’ in which inputs (labour, machine, raw material, time & so on) 
          are transformed into an output. 
          In economics sense, there are different forms of production other than manufacturing. When a 
          commodity is transferred from one place to another for consuming in the production process is 
          production. For eg. When sand is transferred from the river bank to construction site by the sand 
          dealer, this activity, too, is production. When a commodity is stored for future consumption or sale, 
          this is also called production.  
          It  is  not  necessary  that  only  physical  conversion  of  inputs  into  tangible  goods  take  place  in 
          production process. Some types of production involves conversion of an intangible input into 
          intangible output. For e.g. both input and output are intangible in the production of medical, legal, 
          social and consultancy services. 
           
           
           
           
           
           
           
           
    COMMERCE        PAPER No. 2: Managerial Economics 
                    MODULE No.13 : Theory of Production: Law of Diminishing Returns