Business, Legal & Accounting Glossary
The phrase production function refers to the relation between the outputs generated by the inputs, capital and labour, of an enterprise. In microeconomics, the production function describes the technology that is available to the firm in mathematical terms. A production function can be represented in two ways, a table or a graph.
In the table format of representation, a production function can be understood from the following example: An input of five units of labour and 2 units of capital, the output produced is 34 units of goods and services. This means that the maximum output which can be achieved from this particular input is 34 units.
Homogeneous and homothetic production functions are two types of production function. Their uniqueness lies in the fact that they are more theoretical than applied in nature.
The complete production function for nations is prepared at times. This is done in macroeconomics. These are basically summations of production functions of producers at an individual level. It is not regarded as a practical way of compiling production function figures as there are a number of faults.
The production function is also regarded by economists as an abstract way to show the relation between the production of a particular firm and inputs used in the production process. However, there are some other economists who are of the opinion that production function is a useful and important donation of economic discipline to the human thought process.
It needs to be remembered that the particular technology used in order to process inputs and produce outputs also goes a long way in determining production function figures.
Short Run is defined to a time period where at least one factor of production has its fixed supply, which cannot be changed. In such cases, the quantity of capital inputs (e.g. plant and machinery) remains fixed and production can be changed through variable inputs such as labour, raw materials and energy. Q = F(L, K) [Where L (Labor is meant to be variable and K (Capital is fixed) over short run]
Law of diminishing returns also known as the law of variable proportion states that when we add more units of a variable input (labour or others) to fixed amounts of land and capital, the change in total output will at first rise and then fall.
In the Long Run, all the factors of production are variable. Output responding to factor inputs are regarded as returns to scale.
Isoquants, show the possible combinations of inputs that are capable of producing a particular amount of output.
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This glossary post was last updated: 29th March, 2020 | 0 Views.