PRODUCTION ANALYSIS. SCOPE PRODUCTION POSSIBILITY ANALYSIS. ― ― LAW OF VARIABLE PROPORTION. ―...

PRODUCTION ANALYSISPRODUCTION ANALYSIS

SCOPESCOPE

PRODUCTION POSSIBILITY ANALYSIS.

― LAW OF VARIABLE PROPORTION.

― LAW OF RETURN TO SCALE.

ISOQUANT - ISOCOST ANALYSIS.

OUTPUT

PRODUCTIONPRODUCTION

PRODUCTION ANALYSISPRODUCTION ANALYSIS

INPUT

PRODUCTION: CONVERSION OR TRANSFORMATION

OF INPUTS TO OUTPUT.

PROCESS ADDS VALUE TO INPUTS TO SATISFY

NEEDS/ WANTS.

PRODUCTION: ADDITION OF VALUE/ UTILITY.

DEFENCE SERVICES PRODUCERS – THEY

SATISFY NEEDS OF NATIONAL SECURITY

OUTPUT PRODUCTION ANALYSIS

PRODUCTIONPRODUCTION

PRODUCTION ANALYSISPRODUCTION ANALYSIS

INPUT

PRODUCTION ANALYSIS: LAWS GOVERNING

RELATIONSHIP BETWEEN INPUTS & OUTPUTS.

LAWS HELP DECIDE OPTIMAL COMBINATION OF

INPUTS (RESOURCES) FOR DESIRED RESULTS AT

LOWEST COST. DEFENCE SERVICESDEFENCE SERVICES

LAWS

LAW OF VARIABLE PROPORTIONS.

LAW OF RETURN TO SCALE.

ANALYSIS TECHNIQUES

PRODUCTION POSSIBILITY ANALYSIS.

ISO-COST / ISO-QUANT ANALYSIS.

PRODUCTION ANALYSISPRODUCTION ANALYSIS

OUTPUT PRODUCTION ANALYSIS

PRODUCTIONPRODUCTION

PRODUCTION ANALYSISPRODUCTION ANALYSIS

INPUT

PRODUCTION ANALYSIS: LAWS GOVERNING

RELATIONSHIP BETWEEN INPUTS & OUTPUTS.

LAWS HELP DECIDE OPTIMAL COMBINATION OF

INPUTS (RESOURCES) FOR DESIRED RESULTS AT

LOWEST COST.

SUBSTITUTION OF RESOURCE

WITHIN ONE INPUT ITSELF: INCREASE/ DECREASE

ONE INPUT BY ANOTHER.

PRODUCTION FUNCTIONPRODUCTION FUNCTION

• INFANTRY Vs MECHANISED

• AD AIRCRAFT Vs MISSILES

• GUNS Vs GROUND STRIKE AIRCRAFT

PRODUCTION FUNCTION

• RELATIONSHIP BETWEEN INPUTS AND

OUTPUTS

• P = f (R1,R2…Rn)

HOW TOTAL & MARGINAL OUTPUT IS AFFECTED

BY CHANGE IN ONE INPUT KEEPING OTHER

INPUTS CONSTATNT.

“AS PROPORTION OF ONE FACTOR IN A

COMBINATION OF FACTORS IS INCREASED,

MARGINAL & AVERAGE OUTPUTS WILL INCREASE

THEN AFTER A POINT, FIRST MARGINAL AND

THEN AVERAGE OUTPUT WILL DIMINISH”.

APPLICABLE IN SHORT RUN.

LAW OF VARIABLE PROPORTIONSLAW OF VARIABLE PROPORTIONS

EFFECT ON OUTPUT: THREE STAGES

INCREASING RETURNS – MARGINAL RETURN

RISES

CONSTANT RETURNS – MARGINAL RETURN

FALLS

DIMINISHING RETURNS – MARGINAL RETURN

BECOMES NEGATIVE

LAW OF VARIABLE PROPORTIONSLAW OF VARIABLE PROPORTIONS

LAW OF VARIABLE PROPORTIONSLAW OF VARIABLE PROPORTIONSPRODUCTION OF AMN SHELLS PER MACHINE PER

HOUR IN ORD FACTORY

NO OF WORKERS

TOTAL PRODUCTION

AVERAGE PRODUCTION

MARGINAL PRODUCTION

STAGES OF PRODUCTION

1 8 8 8

2 20 10 12

3 36 12 16

4 48 12 12

5 55 11 8

6 60 10 5

7 60 8.6 0

8 56 7 - 4

LAW OF VARIABLE PROPORTIONSLAW OF VARIABLE PROPORTIONSPRODUCTION OF AMN SHELLS PER MACHINE PER

HOUR IN ORD FACTORY

NO OF WORKERS

TOTAL PRODUCTION

AVERAGE PRODUCTION

MARGINAL PRODUCTION

STAGES OF PRODUCTION

1 8 8 8 I

2 20 10 12 I

3 36 12 16 I

4 48 12 12 II

5 55 11 8 II

6 60 10 5 II

7 60 8.6 0 III

8 56 7 - 4 III

LAW OF VARIABLE PROPORTIONS

LABOUR

TP

MP/AP

STAGE I II III

1 2

AP

MP

B

A

MP > APAP > MP

INCREASING RETURN: INCREASE IN OUTPUT MORE

THAN PROPORTIONATE TO INCREASE IN INPUT

OPTIMAL POINT

IN EMPLOYMENT

OF FACTOR

CONSTANT RETRUN: INCREASE IN OUTPUT

PROPORTIONATE TO INCREASE IN INPUT

DIMNISHING RETURN: INCREASE IN OUTPUT LESS

THAN PROPORTIONATE TO INCREASE IN INPUT

EXAMPLES OF LAW OF VARIABLE PROPORTIONS

NO OF AIRCRAFT TAKING PART IN BOMBING MISSION AND DESTRUCTION SOUGHT.

NO OF GUNS ALLOTTED TO NEUTRALISE A TARGET AND EFFECT ACHIEVED.

AMOUNT OF TIME ALLOCATED TO TRAINING AND STANDARDS ACHIEVED.

NO OF MEN ALLOCATED TO A TASK AND OUTPUT.

IN SHORT, IN SITUATIONS WHERE ONE FACTOR IS INCREASED, WHILE OTHERS REMAIN CONSTANT.

ASSUMPTIONS

NO CHANGE IN TECHNOLOGY

IMPROVEMENT IN TECHNOLOGY BOUND

TO RAISE OUTPUT.

ONLY ONE FACTOR VARIABLE, REST

CONSTANT.

LAW OF VARIABLE PROPORTIONSLAW OF VARIABLE PROPORTIONS

LAW OF RETURN TO SCALELAW OF RETURN TO SCALE

DEALS WITH EFFECT ON OUTPUT, WHEN ALL

INPUTS CHANGE SIMULTANEOUSLY IN SAME

RATIO - DOUBLE, TREBLE ETC…

LARGER THE SCALE OF ACTIVITIES – LOWER

GENERALLY THE COST OF ACHIEVING

OUTPUT.

ECONOMIES OF SCALE ARISE FROM LARGE

SCALE ACTIVITIES.

LAW OF RETURN TO SCALELAW OF RETURN TO SCALE

ECONOMIES RESULT FROM

EFFICIENT USE OF RESOURCES

FULLER UTILISATION OF EXISITING CAPACITY

R&D

ECONOMIES OF SCALE

TRUE ONLY UP TO A POINT.

THEN DIS-ECONOMIES SETS IN.

THREE STAGES

INCREASING RETURNS – MARGINAL RETURN

RISES

CONSTANT RETURNS – MARGINAL RETURN

CONSTANT

DIMINISHING RETURNS – MARGINAL RETURN

DIMNISHES

LAW OF RETURN TO SCALELAW OF RETURN TO SCALE

RETURNS TO SCALERETURNS TO SCALE(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)

FACTORS OF PRODN EMP TOTAL PRODUCTS/RETURNS

MARGINAL PRODUCT/

RETURNS

STAGE OF RETURN TO SCALE

RETURNS TO SCALERETURNS TO SCALE(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)

FACTORS OF PRODN EMP TOTAL PRODUCTS/RETURNS

MARGINAL PRODUCT/

RETURNS

STAGE OF RETURN TO SCALE

1 WORKER+3 hrs

RETURNS TO SCALERETURNS TO SCALE(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)

FACTORS OF PRODN EMP TOTAL PRODUCTS/RETURNS

MARGINAL PRODUCT/

RETURNS

STAGE OF RETURN TO SCALE

1 WORKER+3 hrs

2 WORKERS + 6 hrs

RETURNS TO SCALERETURNS TO SCALE(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)

FACTORS OF PRODN EMP TOTAL PRODUCTS/RETURNS

MARGINAL PRODUCT/

RETURNS

STAGE OF RETURN TO SCALE

1 WORKER+3 hrs

2 WORKERS + 6 hrs

3 WORKERS + 9hrs

4 WORKERS+ 12 hrs

5 WORKERS +15 hrs

6 WORKERS + 18 hrs.

7 WORKERS + 21 hrs

8 WORKERS + 24 hrs

9 WORKERS + 27 hrs

RETURNS TO SCALERETURNS TO SCALE(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)

FACTORS OF PRODN EMP TOTAL PRODUCTS/RETURNS

MARGINAL PRODUCT/

RETURNS

STAGE OF RETURN TO SCALE

1 WORKER+3 hrs 200

2 WORKERS + 6 hrs 500

3 WORKERS + 9hrs 900

4 WORKERS+ 12 hrs 1400

5 WORKERS +15 hrs 1900

6 WORKERS + 18 hrs. 2400

7 WORKERS + 21 hrs 2800

8 WORKERS + 24 hrs 3100

9 WORKERS + 27 hrs 3200

RETURNS TO SCALERETURNS TO SCALE(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)

FACTORS OF PRODN EMP TOTAL PRODUCTS/RETURNS

MARGINAL PRODUCT/

RETURNS

STAGE OF RETURN TO SCALE

1 WORKER+3 hrs 200 200

2 WORKERS + 6 hrs 500 300

3 WORKERS + 9hrs 900 400

4 WORKERS+ 12 hrs 1400 500

5 WORKERS +15 hrs 1900 500

6 WORKERS + 18 hrs. 2400 500

7 WORKERS + 21 hrs 2800 400

8 WORKERS + 24 hrs 3100 300

9 WORKERS + 27 hrs 3200 100

RETURNS TO SCALERETURNS TO SCALE(PRODUCTION OF AMN SHELLS IN ORD FACTORY PER MACHINE)

FACTORS OF PRODN EMP TOTAL PRODUCTS/RETURNS

MARGINAL PRODUCT/

RETURNS

STAGE OF RETURN TO SCALE

1 WORKER+3 hrs 200 200 STAGE OF INCREASING RETURNS

2 WORKERS + 6 hrs 500 300

3 WORKERS + 9hrs 900 400

4 WORKERS+ 12 hrs 1400 500

5 WORKERS +15 hrs 1900 500 STAGE OF CONSTANT RETURNS

6 WORKERS + 18 hrs. 2400 500

7 WORKERS + 21 hrs 2800 400 STAGE OF DECREASING RETURNS

8 WORKERS + 24 hrs 3100 300

9 WORKERS + 27 hrs 3200 100

STAGE 1

STAGE 3

STAGE 2

1 2 3 4 5 6 7 8 9 10 11

MARGINAL

OUTPUT

NO OF COMPOSITE UNITS OF FACTORS OF PRODUCTION

4

3

2

1

0

6

5

MARGINAL PRODUCT CURVE

OPTIMAL POINT IN

EMPLOYMENT OF FACTORS

LAW OF RETURN TO SCALELAW OF RETURN TO SCALE

DIS-ECONOMIES START OPERATING AS SCALE

OF ACTIVITY IS RAISED BEYOND A POINT.

OPTIMUM MIX OF INPUTS TO ACHIEVE THE

RESULT VARIES WITH THE DEGREE OF

RESULT DESIRED.

APPLICABLE IN LONG RUN.

CDR MUST ANALYSE THAT MARGINAL RETURN

IN TERMS OF RESULT NOT LESS THAN

MARGINAL INCREASE IN INPUT.

LAW OF RETURN TO SCALELAW OF RETURN TO SCALE

PRODUCTION POSSIBILITY ANALYSISPRODUCTION POSSIBILITY ANALYSIS

• DETERMINES MAX RESULT POSSIBLE WITHIN

GIVEN RESOURCE ALLOCATION.

• ANALYSIS OF ONE INPUT – TWO OUTPUT CASE.

• DETERMINES MOST EFFICIENT COMBINATION

OF TWO FOR MAXIMISING RESULTS WITHIN

GIVEN ONE INPUT.

• TECHNIQUE MAKES USE OF PRODUCTION

POSSIBILITY CURVE.

PRODUCTION POSSIBILITY ANALYSISPRODUCTION POSSIBILITY ANALYSIS

EXAMPLE

• ALLOCATED BUDGET – C CRORES.

• ACQUISITION OF OPTIMUM COMBINATION OF

OFFENSIVE POTENTIAL (OP) AND DEFENSIVE

POTENTIAL (DP).

• C CRORE – 400 OP OR 930 DP POSSIBLE.

• DEFENCE PLANNER FORMULATES PRODUCTION

POSSIBILITY SCHEDULE.

PRODUCTION POSSIBILITY SCHEDULEPRODUCTION POSSIBILITY SCHEDULE(INPUT- DEFENCE RESOURCES OUTPUT -OP&DP)

POSSIBLE COMBINATIONS

OFFENSIVE POTENTIAL

DEFENSIVE POTENTIAL

A 400 0

B

C

D

E 0 940

COMBINATIONS POSSIBLE

PRODUCTION POSSIBILITY SCHEDULEPRODUCTION POSSIBILITY SCHEDULE(INPUT- DEFENCE RESOURCES OUTPUT -OP&DP)

POSSIBLE COMBINATIONS

OFFENSIVE POTENTIAL

DEFENSIVE POTENTIAL

A 400 0

B 300 520

C 200 730

D 100 870

E 0 940

COMBINATIONS POSSIBLE

REAL SITUATION PRODUCTION POSSIBILITY REAL SITUATION PRODUCTION POSSIBILITY

SCHEDULE CAN BE FORMULATED BASED ON COST SCHEDULE CAN BE FORMULATED BASED ON COST

BENEFIT ANALYSIS, SYSTEM ANALYSIS AND ORBENEFIT ANALYSIS, SYSTEM ANALYSIS AND OR

PRODUCTION POSSIBILITY CURVEPRODUCTION POSSIBILITY CURVE

0 200 400 600 800 1000 1200

500

400

300

200

100

0

E1

E2

E3I2

I1

NON FEASIBLE COMBINATION

DEFENSIVE POTENTIAL

OFFENSIVE

POTENTIAL

COMBINATIONS ON PP

CURVE ARE THE UTMOST

THAT BUDGET CAN FETCH

COMBINATIONS I 1 & I 2

NOT GETTING BEST

OUT OF BUDGET

PP CURVE FOR BUDGET C + X CRORES

EFFICIENCY

PRODUCTION POSSIBILITY CURVEPRODUCTION POSSIBILITY CURVE

0 200 400 600 800 1000 1200

500

400

300

200

100

0

E1E2

E3

DEFENSIVE POTENTIAL

OFFENSIVE

POTENTIALE4

CONCAVE NATURE OF PP CURVE

MARGINAL RATE OF TRANSFORMATION:

(MRT) AMOUNT OF ONE OBJECT GIVEN

TO ACHIEVE EXTRA AMOUNT OF OTHER

MRT: INCREASES PROGRESSIVELY

BECAUSE RESOURCES LESS AND

LESS ADAPTABLE TO OTHER

OBJECT IS DIVERTED.

PRODUCTION POSSIBILITY CURVEPRODUCTION POSSIBILITY CURVE

0 200 400 600 800 1000 1200

500

400

300

200

100

0

E1E2

E3

DEFENSIVE POTENTIAL

OFFENSIVE

POTENTIALE4

ALL COMBINATIONS ON PP CURVE

EFFICIENT: WHICH TO CHOOSE?

IC1

A

B

C

D

INDIFFERENCE CURVEINDIFFERENCE CURVE

ALL POINTS YIELD EQUAL LEVEL OF

MILITARY UTILITY OR EFFECTIVENESS.

DECISION MAKER INDIFFERENT TO

CHOICES BETWEEN COMBINATIONS.

0 200 400 600 800 1000 1200

500

400

300

200

100

0

DEFENSIVE POTENTIAL

OFFENSIVE

POTENTIAL

0 200 400 600 800 1000 1200

500

400

300

200

100

0

DEFENSIVE POTENTIAL

OFFENSIVE POTENTIAL

IC 2 IC 3IC 1

INDIFFERENCE MAPINDIFFERENCE MAP

EACH CURVE REPRESENTS

DIFFERENT LEVEL OF

EFFECTIVENESS.

PRODUCTION POSSIBILITY CURVE WITH INDIFFERENCE MAP SUPERIMPOSED

0 200 400 600 800 1000 1200

500

400

300

200

100

0

DEFENSIVE POTENTIAL

OFFENSIVE POTENTIAL

IC 2 IC 3IC 1

E1

E3

E4

E

N

N

I-INEFFICIENT

E- POSSIBLE & OPTIMUM

N-NON FEASIBLE

I

I

I

E2

E5

PRODUCTION POSSIBILITY CURVE WITH INDIFFERENCE MAP SUPERIMPOSED

0 200 400 600 800 1000 1200

500

400

300

200

100

0

DEFENSIVE POTENTIAL

OFFENSIVE POTENTIAL

IC 2 IC 3IC 1

E1

E3

E4

E

I

I

I

E2

E5

PP CURVE SHOWS ALL

COMBINATIONS UTMOST

THAT BUDGET CAN FETCH

(EFFICIENCY) .

INDIFFERENCE CURVE

SHOWS ALL COMBINATIONS

HAVING EQUAL LEVEL OF

MILITARY UTILITY

(EFFECTIVENESS) .

INDIFFERNCE CURVE ANALYSISNATIONAL SECURITY VS DEVP

0 10 20 3040 50 60 70 80 90

LEVEL OF SECURITY %

RATE OF ECO DEVP

20

10

POLICY FEASIBILITY

CURVE BASED ON

GDP

(TOTAL RESOURCES)

POLICY FEASIBLE AREA

0

INDIFFERENCE CURVE

DEFENCE EXP VS DEVP

0 10 20 3040 50 60 70 80 90

LEVEL OF SECURITY %

RATE OF ECO DEVP

20

10

INDIFFERENCE CURVES SHOWING THE DEGREE TO WHICH NATIONAL INTERESTS ARE METIC5

IC 4IC3

0

IC2

IC1

PRODUCTION POSSIBILITY CURVE WITH INDIFFERENCE CURVE SUPERIMPOSED

DEFENCE EXP VS DEVP

0 10 20 3040 50 60 70 80 90

LEVEL OF SECURITY %

RATE OF ECO DEVP

20

10

INDIFFERENCE CURVES SHOWING THE DEGREE TO WHICH NATIONAL INTERESTS ARE METIC5

IC 4IC3POLICY FEASIBLE AREA

0

POLICY FEASIBILITY CURVE BASED ON GDP(TOTAL RESOURCES)

E D

C

A

BIC2

IC1

PRODUCTION POSSIBILITY CURVE PRODUCTION POSSIBILITY CURVE APPLICATIONSAPPLICATIONS

A SQN OF TPT AIRCRAFT LIFTING MEN AND

MATERIAL.

AN ENGINEER COY CLEARING MINES AND

CONSTRUCTING DEFENCES.

A SET OF MACHINES PRODUCING TWO PRODUCTS.

FORCES USED NOW AND HELD IN RESERVE.

ALL SITUATIONS WHERE ONE RESOURCE CAN BE

USED FOR TWO PURPOSES

ISOQUANT CURVEISOQUANT CURVE

0 20 40 60 80 100

100

80

60

40

20

0

BOMBS

BOMBERS

10 TARGETS DESTRUCTION

TWO COMBINATION OF INPUTS

GIVING SAME OUTPUT

MORE BOMBERS WITH SINGLE BOMBS

BOMBERS WITH TWO BOMBS

LESSER NO OF BOMBERS

FLYING MORE SORTIES

ISOQUANT CURVESISOQUANT CURVES

20 TARGETS

30 TARGETS

40 TARGETS

0 20 40 60 80 100

100

80

60

40

20

0

BOMBS

BOMBERS

10 TARGETS

50 TARGETS

DIFFERENT ISOQUANT FOR

DIFFERENT OUTPUTS

IT IS POSSIBLE TO MOVE

TO HIGHER LEVEL OF

OUTPUT BY INCREASING

ATLEAST ONE INPUT.

ISOCOST LINE OR EXCHANGE CURVE OR EQUAL COST LINE OR BUDGET LINE

0 20 40 60 80 100

100

80

60

40

20

0

BOMBS

BOMBERSXX

YY YY11

VARIOUS COMBINATIONS OF

BOMBERS AND BOMBS THAT CAN

BE PROCURED IN GIVEN BUDGET

ISOQUANT & ISOCOSTCURVESISOQUANT & ISOCOSTCURVES

0 20 40 60 80 100

100

80

60

40

20

0

BOMBS

BOMBERS

20 TARGETS

50 TARGETS

30 TARGETS40 TARGETS

10 TARGETS

E1E

ISOCOST shows exchange/

subs between items keeping

budget constant (ECONOMY).

ISOQUANT shows exchange/ subs

between items keeping output

constant (EFFECTIVENESS).A

BD

ISOQUANT AND ISOCOST ANALYSIS ISOQUANT AND ISOCOST ANALYSIS APPLICATIONSAPPLICATIONS

SITUATIONS WHERE TWO PARTIALLY SUBSTITUTABLE FACTORS PRODUCE SAME OUTPUT.

EFFECTIVENESS IN A GIVEN BUDGET.

COMBINATION FOR A GIVEN BUDGET AND EFFECTIVENESS.

BUDGET INCREASE REQUIRED FOR ENHANCING EFECTIVENESS.

REDUCTION IN EFFECTIVENESS DUE TO BUDGET CUT OR INCREASE IN PRICE.