What is the Production Function?
We studied consumer behavior, demand, and also saw the relationship between price and quantity demanded. Now, we will level up a little bit and look at the producer behavior. In this post, I will explain the basic concepts of production, the types of the production function, time dimensions, and factor inputs. This will form our basis to understand the relationship between price and quantity supplied. Let’s learn.
What do we mean by production?
Production means any process that transforms one commodity into another, that is, the transformation of inputs into outputs. This is simple, converting raw materials into final goods, which are available for consumption.
What is the production function?
The production function of a firm or a business unit is a functional relationship between inputs used and the outputs produced. Production function considers only the efficient use of inputs when technology is given.
The production function is represented by the following:
Q= f (L,K)
Q – Output produced
f – functional relationship
L – Labor input
K – Capital input
Even though we have 4 factors of productions (land, labor, capital, and entrepreneurs) here, the production function is using only labor and capital as the factor inputs. Why? To keep it easy to understand, we only use 2 factors of production.
Types of Time Dimensions used in the Production Function.
Very Short Period
During this time, the production cannot be increased as all factors are fixed, none of them is variable (changes). For example, a lady invested all her savings in starting a business of her own. It requires huge investment, like buying a piece of land, renovating it according to the business needs, hiring labor or workers, etc. So, she cannot expect to make changes during the initial phase of starting a business, as she invested whatever she had.
During this time, production can be increased only by increasing the variable factors and the fixed factors remain constant. Imagine its been 5 years, and her business is doing pretty stable. She might have recovered the initial investment, and now she can think about hiring an additional workforce, to increase her laptop business sales. So, at this time she can change the labor, but as of now she cannot buy another piece of land or opening another branch of her business.
During this period, production can be increased by increasing the quantity of fixed as well as a variable factor because, in the long run, all factors become variable. For example, its been 10- 15 years of her laptop business, and it is doing great in terms of revenue and profits. Now, she can think about opening another branch (land) and hiring more labor force (labor). Hence, all factors become variable in a long period.
Types of Inputs (factors) used in production
Variable means change, so variable inputs are those inputs that can vary (change). For example, labor in a short period and a long period.
Fixed inputs are those inputs that can not vary and remain fixed. For example, the land remains fixed irrespective of the production done.
Types of Production Function
Short-run production function
Under this just like a short period, one-factor input is variable (change), and another input is fixed. It is represented by the following:
Q = f (L, K*)
K* means it is constant or fixed or it cannot change.
Long-run production function
Under this, just like a long period, all factor inputs become variable. There is no fixed factor. Production function here is represented by the following:
Q = f (L,K)
The graphical presentation of production function
For drawing a production function, the factors inputs are plotted on X-axis, and production (or output) is plotted on Y-axis. The following shape of the production function is due to change in factor inputs, causing production level to increase in the beginning, reach its maximum, and starts falling after reaching the maximum point.
Since the output is dependent on factor inputs, the output is plotted on Y-axis, and the independent variable, which is factor inputs, is plotted on X-axis.
Thank You for reading. Feel free to join my Facebook group meant for economics students, and you can also subscribe to this website.