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
- Technology is invariant
- Firms utilize their inputs as maximum level of their efficiency
Production Function
- Short-run production function (Returns to a factor) or law of variable proportion
- 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