Production function describes the technological relationship between inputs and output in physical terms. Study of production function is directed towards establishing the maximum output which can be achieved with given set of factors of production.

1. BUSINESS ECONOMICS
UNIT II
PRODUCTION FUNCTION

2. PRODUCTION FUNCTION
 The relationship between the inputs and the outputs produced
by those inputs.
 Production function describes the technological relationship
between inputs and output in physical terms.
 Study of production function is directed towards establishing
the maximum output which can be achieved with given set of
factors of production.
 It specifies maximum quantity of a commodity that can be
produced per unit of time with given quantities of input and
technology.

3. Q = f ( L, K, LB, M, T, t, e ……….)
where Q = the Quantity of output produced.
L = Labor
K = Capital
LB = Land / Building
M = Materials
T = Technology
t = time
e = managerial efficiency
The general form of production function is :
Q = f ( K, L)
where Q = the Quantity of output produced.
L = Labor
K = Capital
EMPIRICAL FORM OF
PRODUCTION FUNCTION

4. ASSUMPTIONS
 The factors of production are divisible into viable units.
 Limited substitution of one factor to other.
 Constant technology; and
 Inelastic supply of fixed factors in short run.

5. IMPORTANT CONCEPTS
Short run and long run : The reference to time period
involved in production process is an important concept used in
production analysis.
Short run refers to a period of time in which the supply of
certain inputs is fixed or is inelastic. In short run supply of capital
is fixed therefore in short run the firm can increase its production
by increasing only labor. Q = f (L)
The long run refers to a period of time in which the supply of
all inputs is elastic, but not enough to permit a change in
technology. In long run both capital and labor are included.
Q = f (K, L)

6. THERE ARE THREE IMPORTANT WAYS TO MEASURE THE
PRODUCTIVITY OF LABOR
Total product (TP)
Average product (AP)
Marginal product (MP)
9 / 1 8 / 2 0 1 4
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7. TOTAL PRODUCT FUNCTION
(TOTAL PRODUCT)
Represents the relationship
between the number of
workers (L) and the TOTAL
number of units of output
produced (Q) holding all
other factors of production
(the plant size) constant.
For a coffee shop, output would be
measured in “number of coffee cups a
day”
For a steel mill, output would be
measured in “tons of steel produced a
day”

8. • The law of returns are
concerned with relation between
marginal change in input and
resulting marginal change in
output.
• The MPL may be defined as the
change in output (Q) resulting
from small change in labor ΔL
employed other factors held
constant.
• MPL is given by slope of curve
TPL .
MARGINAL PRODUCT

9. TOTAL AND MARGINAL PRODUCT

10. LAWS OF PRODUCTION
Production Function with one variable input : The
law of variable proportions
Production function with two variable input : The
law of returns to scale

11. PRODUCTION FUNCTION WITH ONE
VARIABLE INPUT.
In the short run, production function is explained with one variable
factor and other factors of productions are held constant. We have
called this production function as the Law of Variable Proportions or
the Law of Diminishing returns.