Production function

(noun)

Relates physical output of a production process to physical inputs or factors of production.

Related Terms

Examples of Production function in the following topics:

  • Defining the Production Function

    • In economics, a production function relates physical output of a production process to physical inputs or factors of production.
    • 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 2Qproduction function has increasing marginal costs and diminishing returns to scale.
    • Another common production function is the Cobb-Douglas production function.
    • This production function is given by Q=Min(K,L).

  • Aggregate Production

    • The aggregate production function examines how the productivity depends on the quantities of physical capital per worker and human capital per worker.
    • The production function relates the physical outputs of production to the physical inputs or factors of production.
    • Production functions assume that the maximum output is attainable from a given set on inputs.
    • Aggregate production functions study the short-run inputs and outputs of a firm or economy.
    • The production function of a firm or economy can be graphed using the total, average, and marginal products.

  • Measuring Productivity

    • Productivity is represented by production functions, and is the amount of output that can be generated from a set of inputs.
    • In order to generate meaningful information about the productivity of a given system, production functions are used to measure it.
    • There are a variety of ways to approach the measuring of productivity in the context of production functions:
    • Functional Form: One way a production function can be illustrated is through the following equation$Q = f(X_1,X_2,X_3,...
    • Leontief Production Function: The Leontief Production Function assumes a technologically pre-determined set of proportions for the factors of production (i.e. no ability to substitute between factors.

  • Inputs and Outputs of the Function

    • In the basic production function, inputs are typically capital and labor and output is whatever good the firm produces.
    • A production function relates the input of factors of production to the output of goods.
    • In the basic production function inputs are typically capital and labor, though more expansive and complex production functions may include other variables such as land or natural resources.
    • When looking at the production function in the short run, therefore, capital will be a constant rather than a variable.
    • It can be found by taking the derivative of the production function in terms of the relevant input.

  • The Importance of Productivity

    • This demonstrates the confinement of productivity, and thus is well captured in the Leontief production function.
    • The critical takeaway here is that the production function will generally be affected by two things: overall supply and technological capabilities.
    • Note that demand does not come into account in altering the production function or overall productivity potential.
    • The illustration in the following figure demonstrates an increase in PPF, thus affecting the production function.
    • Use the production function to determine how different variables affect output and productivity

  • Marginal Product of Labor (Physical)

    • When production is discrete, we can define the marginal product of labor as ΔY/ΔL where Y is output.
    • When production is continuous, the MPL is the first derivative of the production function in terms of L.
    • Graphically, the MPL is the slope of the production function.
    • gives another example of marginal product of labor.
    • The law states that "as units of one input are added (with all other inputs held constant) a point will be reached where the resulting additions to output will begin to decrease; that is marginal product will decline. " The law of diminishing marginal returns applies regardless of whether the production function exhibits increasing, decreasing or constant returns to scale.

  • Supply Function

    • A supply function is a model that represents the behavior of the producers and/or sellers in a market.
    • Like the demand function, supply can be viewed from two perspectives.
    • Figure III.A.5 is a graphical representation of a supply function.
    • The equation for this supply function is Qsupplied= -10 + 2P.
    • Table III.A5 also represents this supply function.

  • Total Factor Productivity

    • Total factor productivity cannot be measured directly.
    • In the Cobb-Douglas production function, total factor productivity is captured by the variable A:
    • How effectively the factors of production are used is also important.
    • Total factor productivity can be used to measure competitiveness.
    • Total output is not only a function of labor and capital, but also of total factor productivity, a measure of efficiency.

  • Product Differentiation

    • Product differentiation (or simply differentiation) is the process of distinguishing a product or service from others, to make it more attractive to a particular target market.
    • This involves differentiating it from competitors' products as well as a firm's own products.
    • Differentiation is due to buyers perceiving a difference; hence, causes of differentiation may be functional aspects of the product or service, how it is distributed and marketed, or who buys it.
    • The major sources of product differentiation are as follows:
    • A successful product differentiation strategy will move a product from competing based primarily on price to competing on non-price factors (such as product characteristics, distribution strategy, or promotional variables).

  • Product Differentiation

    • Product differentiation is the process of distinguishing a product or service from others to make it more attractive to a target market.
    • Product differentiation is the process of distinguishing a product or service from others to make it more attractive to a target market .
    • Product differentiation is done in order to demonstrate the unique aspects of a firm's product and to create a sense of value.
    • Drivers of differentiation include functional aspects of the product or service, how it is distributed and marketed, and who buys it.
    • A successful product differentiation strategy will move the product from competing on price to competing on non-price factors.