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Production Function

The document discusses production functions in economics. It defines the production function as the relationship between physical inputs (factors of production) and the output. Production functions are defined differently in the short run versus the long run. In the short run, some factors are fixed, while in the long run all factors are variable. The short-run production function explains how output changes when one variable input changes, while the long-run production function shows how output changes when all inputs change proportionally. Constant, increasing, and decreasing returns to scale describe how output changes relative to proportional input changes in the long run.

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shrey
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3K views

Production Function

The document discusses production functions in economics. It defines the production function as the relationship between physical inputs (factors of production) and the output. Production functions are defined differently in the short run versus the long run. In the short run, some factors are fixed, while in the long run all factors are variable. The short-run production function explains how output changes when one variable input changes, while the long-run production function shows how output changes when all inputs change proportionally. Constant, increasing, and decreasing returns to scale describe how output changes relative to proportional input changes in the long run.

Uploaded by

shrey
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Economics

Name: Shrey .D. Doshi


Roll No.:21
Std: FY BFM -A

Production Function

To understand production and costs it is important to grasp the concept of the


production function and understand the basics in mathematical terms. We break
down the short run and long run production functions based on variable and fixed
factors. Let us get started!

What is the Production Function?

The functional relationship between physical inputs (or factors of production) and
output is called production function. It assumed inputs as the explanatory or
independent variable and output as the dependent variable. Mathematically, we
may write this as follows:

Q = f (L,K)

Here, ‘Q’ represents the output, whereas ‘L’ and ‘K’ are the inputs, representing
labour and capital (such as machinery) respectively. Note that there may be many
other factors as well but we have assumed two-factor inputs here.

Time Period and Production Functions


The production function is differently defined in the short run and in the long run.
This distinction is extremely relevant in microeconomics. The distinction is based
on the nature of factor inputs.

Those inputs that vary directly with the output are called variable factors. These
are the factors that can be changed. Variable factors exist in both, the short run
and the long run. Examples of variable factors include daily-wage labour, raw
materials, etc.

On the other hand, those factors that cannot be varied or changed as the output
changes are called fixed factors. These factors are normally characteristic of the
short run or short period of time only. Fixed factors do not exist in the long run.

Consequently, we can define two production functions: short-run and long-run.


The short-run production function defines the relationship between one variable
factor (keeping all other factors fixed) and the output. The law of returns to a
factor explains such a production function.
For example, consider that a firm has 20 units of labour and 6 acres of land and it
initially uses one unit of labour only (variable factor) on its land (fixed factor). So,
the land-labour ratio is 6:1. Now, if the firm chooses to employ 2 units of labour,
then the land-labour ratio becomes 3:1 (6:2).

The long-run production function is different in concept from the short run
production function. Here, all factors are varied in the same proportion. The law
that is used to explain this is called the law of returns to scale. It measures by how
much proportion the output changes when inputs are changed proportionately.

The Short-Run Production Function:

In the short run, the technical conditions of production are rigid so that the
various inputs used to produce a given output are in fixed proportions.
However, in the short run, it is possible to increase the quantities of one input
while keeping the quantities of other inputs constant in order to have more
output. This aspect of the production function is known as the Law of Variable
Proportions. The short-run production function in the case of two inputs, labour
and capital, with capital as fixed and labour as the variable input can be
expressed as

Q=f (L,K)

where K refers to the fixed input. … (3)

This production function is depicted in Figure 1 where the slope of the curve
shows the marginal product of labour. A movement along the production
function shows the increase in output as labour increases, given the amount of
capital employed K;. If the amount of capital increases to K, at a point of time,
the production function Q = f (L, K 1) shifts upwards to Q = f (L,K2 ), as shown
in the figure.
On the other hand, if labour is taken as a fixed input and capital as the variable
input, the production function takes the form Q =f (KL)

This production function is depicted in Figure 2 where the slope of the curve
represents the marginal product of capital. A movement along the production
function shows the increase in output as capital increases, given the quantity of
labour employed, L2 If the quantity of labour increases to L2 at a point of time,
the production function Q = f (K,L 1) shifts upwards to Q=f(KL2).

The Long-Run Production Function:

In the long run, all inputs are variable. Production can be increased by changing
one or more of the inputs. The firm can change its plants or scale of production.
Equations (1) and (2) represent the long-run production function. Given the
level of technology, a combination of the quantities of labour and capital
produces a specified level of output.

The long-run production function is depicted in Figure 3 where the combination


of OK of capital and OL of labour produces 100 Q. With the increase in inputs
of capital and labour to OK1 and OL1, the output increases to 200 Q. The long-
run production function is shown in terms of an isoquant such as 100 Q.

In the long run, it is possible for a firm to change all inputs up or down in
accordance with its scale. This is known as returns to scale. The returns to scale
are constant when output increases in the same proportion as the increase in the
quantities of inputs. The returns to scale are increasing when the increase in
output is more than proportional to the increase in inputs. They are decreasing if
the increase in output is less than proportional to the increase in inputs.

Let us illustrate the case of constant returns to scale with the help of our
production function.

Q = (L, M, N, К, T)

Given T, if the quantities of all inputs L, M, N, K are increased n-fold, the


output Q also increases и-fold. Then the production function becomes nQ –f
(nL, nM, nN, nK).
This is known as linear and homogeneous production function, or a
homogeneous function of the first degree. If the homogeneous function is of the
Kth degree, the production function is nk.Q = f (nL, nM, nN, nK) If k is equal to
1, it is a case of constant returns to scale; if it is greater than 1, it is a case of
increasing returns of scale; and if it is less than 1, it is a case of decreasing
returns to scale.

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