Explain in brief the concept of production function.
Answers
Defining the Production Function
The production function relates the maximum amount of output that can be obtained from a given number of inputs.The production function describes a boundary or frontier representing the limit of output obtainable from each feasible combination of inputs.
Firms use the production function to determine how much output they should produce given the price of a good, and what combination of inputs they should use to produce given the price of capital and labor.
The production function also gives information about increasing or decreasing returns to scale and the marginal products of labor and capital.
Key Terms
Production function: Relates physical output of a production process to physical inputs or factors of production.
marginal cost: The increase in cost that accompanies a unit increase in output; the partial derivative of the cost function with respect to output. Additional cost associated with producing one more unit of output.
output: Production; quantity produced, created, or completed.
In economics, a production function relates physical output of a production process to physical inputs or factors of production. It is a mathematical function that relates the maximum amount of output that can be obtained from a given number of inputs – generally capital and labor. The production function, therefore, describes a boundary or frontier representing the limit of output obtainable from each feasible combination of inputs.
Firms use the production function to determine how much output they should produce given the price of a good, and what combination of inputs they should use to produc
Increasing marginal costs can be identified using the production function. If a firm has a production function Q=F(K,L) (that is, the quantity of output (Q) is some function of capital (K) and labor (L)), then if 2Q<F(2K,2L), the production function has increasing marginal costs and diminishing returns to scale. Similarly, if 2Q>F(2K,2L), there are increasing returns to scale, and if 2Q=F(2K,2L), there are constant returns to scale.
Examples of Common Production Functions
One very simple example of a production function might be Q=K+L, where Q is the quantity of output, K is the amount of capital, and L is the amount of labor used in production. This production function says that a firm can produce one unit of output for every unit of capital or labor it employs. From this production function we can see that this industry has constant returns to scale – that is, the amount of output will increase proportionally to any increase in the amount of inputs.
Another common production function is the Cobb-Douglas production function. One example of this type of function is Q=K0.5L0.5. This describes a firm that requires the least total number of inputs when the combination of inputs is relatively equal. For example, the firm could produce 25 units of output by using 25 units of capital and 25 of labor, or it could produce the same 25 units of output with 125 units of labor and only one unit of capital.
Finally, the Leontief production function applies to situations in which inputs must be used in fixed proportions; starting from those proportions, if usage of one input is increased without another being increased, output will not change. This production function is given by Q=Min(K,L). For example, a firm with five employees will produce five units of output as long as it has at least five units of capital