Production Function

Production in the short run and long run

• Production- transformation of inputs into output(s).
• Production function- technological relationship between
quantities of inputs that a firm uses and the output that it
produces, given current knowledge about technology and
organization.
Production function with 2 inputs can be expressed as
Q= f(K,L) and that with 4 inputs in general as Q=f(K,L,E,M)
• short run: a period of time so brief that at least one factor of
production is fixed.
• fixed input: a factor that cannot be varied practically in short
run.
• variable input: a factor whose quantity can be changed readily
during the relevant time period.
• long run: lengthy enough period of time that all inputs can be
varied.
 Short-run production function
(Law of variable proportions)
• Assumptions: technology is given and constant, variable factor
units are homogeneous, operates in the short run.
• Assume a production function with 2 inputs, q= f(K,L)
one variable input: Labor (L)
one fixed input: Capital (K)
thus, firm can increase output only by using more labor.
• Total Product(TP)- total amount of output produced during
some period of time by all the inputs that the firm uses.
- TP first increases at an increasing rate and then increases at a
diminishing rate.
• Average Product(AP)- total product per unit of the variable
input used.
APL=TP
L
- AP rises initially and then falls with labor.
Marginal Product(MP)-change in the total product
resulting from the use of one more(or one less) unit of the
variable input.
Or change in total output, q, resulting from using an extra
unit of labor, L = 1, holding the other factor (K) constant .
MPL = q
L
– first rises and then falls.
– MP reaches its maximum at a lower level of labor
than does AP.
– MP=AP only when AP is maximum.
• Law of variable proportions states that if more and
more units of a variable factor are applied to a given
quantity of fixed factor, the total product initially
increases at an increasing rate and then increases at a
diminishing rate and eventually diminishes.
 Quantity of Total Average Marginal Stages of
Labor(L) Product(TP) Product (AP) Product (MP) Production
1 10 10 10 I
2 30 15 20 I
3 60 20 30 I
4 80 20 20 I
5 95 19 15 II
6 108 18 13 II
7 112 16 4 II
8 112 14 0 II
9 108 12 -4 III
10 100 10 -8 III
Stage I(stage of increasing returns)-
Stage III(stage of negative returns)-
TP,AP,MP increases. MP>AP
TP decreases, AP continues to
TP increases at an increasing rate.
decline but positive, MP becomes
ends where AP is maximum and MP=AP.
negative.
Stage II(stage of diminishing returns)-
TP increases, AP and MP decreases but positive.
TP increases at an decreasing rate. MP<AP
ends where TP reaches maximum and MP is zero.
 TP, AP and MP
120

100

80 I II III
60
TP
40

20

0
0 2 4 6 8 10 12

35

30

25

20

15 AP

10 MP

0
0 2 4 6 8 10 12
-5

-10
 Returns to Scale- Production in the long run

• All factors are varied in the long run.

• Returns to scale deals with changes in output when all factors
or inputs are changed in a given proportion.
• Three phases of returns to scale
1. Increasing returns to scale- the increase in all factors in a
given proportion lead to a more than proportionate increase
in output.
- economies of scale, specialization of labor, superior
machinery
2. Constant returns to scale- if all factors are increased in a
given proportion, output increases in the same proportion.
3. Decreasing returns to scale- the increase in all factors in a
given proportion leads to a less than proportionate increase in
output.
- diseconomies of scale
 Scale Total Marginal Returns to Scale
Product Product
1 Labor + 2 Land 4 4
2 Labor + 4 Land 10 6 Increasing Returns
3 Labor + 6 Land 18 8 to Scale
4 Labor + 8 Land 28 10
5 Labor + 10 Land 38 10 Constant Returns
6 Labor + 12 Land 48 10 to Scale
7 Labor + 14 Land 56 8 Decreasing Returns
8 Labor + 16 Land 62 6 to Scale
MP

12 Constant returns
to scale
10
8
6
4
2

0 1 2 3 4 5 6 7 8 Scale