Production function

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  • Production function is purely a technological relationship which expresses the relation between output of a good and the different combination of inputs used in its production.

  • It indicates the maximum amt of output that can be produced with the help of each possible combination of inputs.

  • The production function written mathematically as

  • Q= F (L, N, K)

  • Q= rate of output

  • Land, labour, capital

Based on Two Main Assumptions

  1. Technology is invariant

  2. Firms utilize their inputs as maximum level of their efficiency

Production Function

  1. Short-run production function (Returns to a factor) or law of variable proportion

  2. long-run production function (Returns to scale)

Short-Run Production Function

  • It is a period where output can be changed by changing only variable factors of production. (fixed factors remain fixed)

  • Key terms:

  • Total product: total quantity of goods produced by a firm during a period of time

  • Marginal product

  • Average product: per unit output

Law of Variable Proportion

(Stage of increasing returns Stage of decreasing returns Stage of negative returns)

  • Plant, machinery, floor space etc. fixed

  • Amt of labour services only vary

Long-Run Production Function

  • A situation where all inputs are subject to variation is a case of long-run function.

  • Behavior of output in response to change in the scale

  • Isoquant:

  • Isoquant is a Curve representing the various combinations of two inputs that produce the same amount of output.

  • Property:

  • Downward sloping

  • Higher isoquant represent larger output

  • No two isoquant intersect or touch each other

  • Convex to the origin

  • Higher isoquant vs. lower isoquant


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Youtube Video Tutorial on Production Function