Production

function
 Its an activity that transforms inputs
in to out puts.
 Inputs Process Output

Land
Product or
Labour service
generated
– value added
Capital
The production function can be
mathematically written as

Q=F(Lb,L,K,T,t….)
Lb=land.
L=labor.
K=capital.
T=Technology.
t=time.
 Short term production function.
(K & Lb are constant)

 Long run production function.

(Lb is constant)
• Technology
• Inputs
• Labor
• Capital
• Machinery
• Land
• Raw material
• power
• Time period
 States the relationship between inputs and
outputs
 Inputs – the factors of production classified as:
 Land – all natural resources of the earth – not just ‘terra
firma’!
▪ Price paid to acquire land = Rent
 Labour – all physical and mental human effort involved
in production
▪ Price paid to labour = Wages
 Capital – buildings, machinery and equipment
not used for its own sake but for the contribution
it makes to production
▪ Price paid for capital = Interest
 In the short run at least one factor fixed in supply but
all other factors capable of being changed
 Reflects ways in which firms respond to changes
in output (demand)
 Can increase or decrease output using more or less of
some factors but some likely to be easier
to change than others
 Increase in total capacity only possible
in the long run

 Law of variable proportion

 The long run is defined as the period of time
taken to vary all factors of production
 By doing this, the firm is able to increase its
total capacity – not just short term capacity
 Associated with a change in the scale of
production
 The period of time varies according to the firm
and the industry
 Constant returns to the scale
out put increases in the same
proportion as the increase in the input.
 Increasing return to scale
out put increases by a greater
proportion than the increase in inputs.
 Decreasing returns to the scale.
output increases in the lesser
proportion than the increase in the inputs.
 Power function

Q= A k L

a is positive function

Q= A k L
b is the positive function
 First , log(Q)=a
log(A)+alog(k)+blog(L)

 Secondly power function are

homogenous


Thirdly = E=dQ/Q = dQ . k
dk/k dk Q
 Fourthly relative share
relative share of k in q can be
obtained

Similarly for ‘b’ L in Q can be obtained

 Finally cod doughlas production

function in general form
Q= k L
Zero cost=zero
Thank You