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The Production Function and economic production

The Production Function and economic production

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Published by TahirAli

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Published by: TahirAli on Jan 31, 2010
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The Production Function and economic production
We have spoken of input like land and Labor and outputs like wheatand toothpaste. But if you have a fixed amount of inputs how much outputcan you get? In practice, the answer depends ‘on the state of technology andengineering knowledge On any day given the available technical knowledge,land, machinery, and so on only a certain quantity of tractors or toothpastecan be obtained from a given amount, of labor. The relationship between theamount of input required and the amount of output that can be obtained iscalled the production function. The production function specifies themaximum output that can be produced with a given quantity of input. It isdefined for a given state of engineering and technical knowledge. For example we can imagine book of technical specifications that shows the production function for ‘generating electricity. On one page there &especification for different-size gas turbines, showing their inputs (initialcapital cost, fuel consumption, and the amount of labor needed to run theturbine) and their outputs (amount of electricity generated). The next pageincludes descriptions of several sizes of coal-fired generating plants,showing inputs and outputs. Yet other pages describe nuclear power plants,solar power stations, and so forth. Together they constitute the productionfunction for electricity generation. Or consider the humble’ task of ditchdigging.’ Outside our windows in America, we see a large and expensivetractor driven by one person with another to supervise. This team can easilydig a trench 5 feet deep and 50 feet long,, in 2 hours. When .we visitVietnam, we see 50 laborers armed only with picks The same trench mighttake an entire day. These two techniques one Capital-intensive and the other labor-intensive are part of the production function for ditch digging. Thereare literally millions different production function one for each and every
 product or service. Most of them are not written down but are in people’sminds. In areas of the economy where technology is changing rapidly, likecomputer software and biotechnology, production functions may becomeobsolete soon after they are used. And some Like the blueprints of a medicallaboratory or cliff house, are specially designed’ for a specific location and purpose and would be useless anywhere else. Nevertheless, the concept of a production function is a useful way of describing the productive capabilitiesof a firm.A production function can be represented in a table such as the one below. Inthis table five units of labor and two of capital can produce 34 units of output. It is, of course, always possible to waste resources and to producefewer than 34 units with five units of labor and two of capital, but the tableindicates that no more than 34 can be produced with the technologyavailable. The production function thus contains the limitations thattechnology places on the firm.A Production FunctionLabor 53034374263033321252821620231101315123CapitalThe production function can also be illustrated in a graph such as that below.This graph looks exactly like a graph of indifference curvesbecause themathematical forms of the production function and the utility function areidentical. In one case, inputs of goods and services combine to produceutility; in the other, inputs of resources combine to produce goods or services. A curved line in the graph shows all the combinations of inputs thatcan produce a particular quantity of output. These lines are called isoquants.As one moves to the right, one reaches higher levels of production. If onecan visualize this as a three-dimensional graph, one can see that the production surface rises increasingly high above the surface of the page; theisoquants indicate a hill. The firm must operate on or below this surface.

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