The Production Function

Y1 stands for the product.

f stands for the phrase “depends on.”
X stands for an input used in the production of Y.
Consider that a farmer might get a yield of 50 bushels of wheat if he sows one bushel of seed on an acre.
If, however, he sows 1.5 bushels of seed on an acre, he will get a 60 bushel yield. Is it worth adding the
extra seed? To figure that out, the farmer needs to know the quantitative relationship between inputs and
outputs. Let us assume that wheat in this example sells at the farm gate for four dollars per bushel and
wheat seed costs ten dollars a bushel. In example one, the farmer will produce a wheat crop worth two
hundred dollars (50 bushels X $4.00 = $200). He will spend ten dollars on seed, leaving him with a profit
of one hundred and ninety dollars. In example two, the farmer will get a yield of sixty bushels by adding
an extra half a bushel of seed.  Thus, his total sales receipt will be two hundred and forty dollars (60
bushels X $4.00 = $240). His expenditure for seed will now be fifteen dollars, thereby leaving him with
two hundred and twenty-five dollars profit. Clearly, adding the extra seed was a good idea, because for an
extra five dollars of input, the farmer received an extra thirty-five dollars. He cannot, however, keep
increasing seed input indefinitely, because he will eventually hit a point at which a unit of input does not
bring sufficient increases in production to offset the costs of the additional unit of input. Suppose the
farmer decides that since he made thirty-five more dollars by adding a half of pound of seed, he will now
add an additional hundred pounds of seed.  By doing this, however, he puts far more seed on the ground
than can quickly germinate.  As a result, all but about two pounds of the seed wheat is eaten by birds.  In
this case, he would spend a thousand dollars for the seed, but realize a total yield of only seventy bushels.
At a price of four dollars a bushel, he would receive two hundred and eighty dollars for his crop, but lose
seven hundred and twenty dollars because of negative returns relative to input costs. 

A production function is a mathematical

relationship that describes the way in which the
quantity of a given product depends upon the
quantities of the inputs used to produce it.
Production functions are a graphic way to find a
level of input that maximizes profits. 
When the value of increased output is greater than
the costs of a unit of increased input, the extra input
is worthwhile. When the value of increased output
is lower than the costs of a unit of increased input,
the extra input is not worthwhile. The producer
should stop increasing units of input at the point
where a dollar’s worth of extra input returns only a
dollar’s worth of extra output. That is the point of
diminishing returns.  
TP = total product
AP= average product
MP = marginal product
Marginal product is the rate of change that occurs with each unit of input. The marginal product is
positive when total production is increasing.  If the total product remains constant as input is added, the
marginal product is zero. In some cases, total product may decrease with additional inputs.  In such cases,
the marginal product is negative.  When additional inputs result in a decreasing level of increase in total
product, the marginal product is decreasing (even though total product is still increasing).
The average product is the amount of production relative to each unit of input at a specific level of
production or level of input. When the average product increases, the marginal product must be greater
than the average product. When the average product is decreasing, the opposite is true.
When MP is greater than AP; AP is increasing.
When MP is less than AP; AP is decreasing.
When MP is equal to AP; AP is at a maximum.
There are three regions in a production function. In region one, the production function extends to the
point where the maximum average product occurs. It is always profitable to continue to add inputs as long
as the average product increases correspondingly. In the third region of the graph, total production is
decreasing, and the marginal product is negative. It is not profitable to operate in region three. Region two
is the region in which production is most profitable because total product is increasing. The place to stop
increasing inputs is that point where a dollar’s worth of input returns a dollar’s worth of output. Stopping
anywhere in region one is not logical because every unit of input is resulting in more returns than costs. 
Whereas farmers may not always take the time to calculate their inputs and outs using this formula,
almost all of them understand these factors intuitively. Inputs may include the cost of new equipment,
seed, fertilizers, irrigation, and methods of cultivation. Farmers who are successful use equipment that is
exactly the right size for their operations. A four-wheel drive John Deere tractor does not make sense for
a twenty acre farm, and conversely, an eighteen horse power Farmall Cub will not get the job done on a
thousand acre wheat ranch.  

What is a production function?

ANSWER:
A production function is a mathematical relationship that describes the way in which the quantity of a
given product depends on the quantities of the inputs used to produce it.
Why is it illogical to stop making inputs while operating in region one of a production function?
ANSWER:
It is illogical to stop making inputs in a given operation when each additional unit of input results in
additional output that is more valuable that the added unit of input. For example, it is illogical for a farmer
to stop increasing his input of fertilizer for an acre of ground when each additional dollar spent fertilizer
results in two dollars in additional output. When he reaches the point where a dollar of input brings a
dollar of output, he should stop adding more fertilizer.