TM – 1

THE PRODUCTION FUNCTION

• The PRODUCTION FUNCTION specifies
the maximum output that can be produced
with a
• GIVEN quantity of inputs and state of
technology.
• counterpart of Total Utility Curve in
Consumer Theory-If more resources used,
more output can be produced

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TM – 2

TOTAL, MARGINAL, and

AVERAGE PRODUCT
• TOTAL PRODUCT-total amount of output
produced in physical units, e.g., cavans pf
rice, bushels of corn etc,
• MARGINAL PRODUCT-EXTRA output
produced by an EXTRA unit of input used,
other inputs held constant.
• AVERAGE PRODUCT-total product or
total units of output divided by total units of
input used.

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TM – 3 Chapter 6
Table 6-1

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TM – 4 Chapter 6
Figure 6-1

Marginal Product Is Derived

from Total Product

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TM – 5

LAW OF DIMINISHING RETURNS

• Less and less output is obtained when

additional units of an input are used,
HOLDING CONSTANT all other inputs,
i.e., the MARGINAL PRODUCT of each
unit of input will DECLINE as the amount
of THAT ONE INPUT increases, holding
constant all other inputs.

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TM – 6

• EXAMPLE-CORN FIELD
• VARIABLE INPUT-Labor, FIXED INPUTS-
land, tech, amount of fertilizers.
• NOTE: ONLY ONE INPUT (in this
example, LABOR) is being changed. All
other inputs are held constant.

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TM – 7

RETURNS TO SCALE
• What happens to TOTAL PRODUCT or
Total Output when the amount of ALL
INPUTS is changed?

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TM – 8

TYPES OF RETURNS TO SCALE

• CONSTANT
• INCREASING
• DECREASING

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TM – 9 Chapter 6
Figure 6-3

Technological Change Shifts

Production Function Upward

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TM – 10

PRODUCTIVITY
• PRODUCTIVITY measures the ratio of
total output to a weighted average of
inputs.
• TWO VARIANTS-LABOR
PRODUCTIVITY AND TOTAL FACTOR
PRODUCTIVITY (TFP)
• Labor Productivity =Output/unit of labor
• TFP=Output/unit of total inputs

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