Business Economics and Financial Analysis

Production Function
By
Dr.T Vara Lakshmi
Associate Professor & Head
Master of Business Administration
 Production Meaning

 Any activity which creates

value is production
 In other words, production
is transformation of inputs
(Capital, equipment, Labor
and land etc.) into Output
such as good or service
 Production Function

Technological relationship
between inputs and outputs of
a firm

Q = f ( Land, Labor, Capital, Technology etc….)

Factors of Production Function
Terminology of Production Function
 Production Function – One variable and two variables

Production Function with one variable Production Function with Two variable
 Types of Production Function

Fixed
Portion
Production
Function
Variable
Long-term Portion
Production Production
Function Function

Producti
on
Function
Linear
Short-term Homogene
Production ous
Function Production
Function
Constant
elasticity
of
substitutio
n
 Fixed Portion Production Function

Leontief Production Function

Implies that fixed factors of production

such as land, labor, raw materials are
used to produce a fixed quantity of an
output and these production factors
cannot be substituted for the other
factors.
 Variable Portion Production Function

Variable Proportion Production Function

Implies that the ratio in which the factors

of production such as labor and capital
are used is not fixed, and it is variable.
Also, the different combinations of
factors can be used to produce the given
quantity, thus, one factor can be
substituted for the other.
 Linear Homogeneous Production Function

Linear Homogeneous Production Function

Implies that with the proportionate change in

all the factors of production, the output also
increases in the same proportion. Such as, if
the input factors are doubled the output also
gets doubled.

This is also known as constant returns to a

scale.
 Constant elasticity of substitution

Constant Elasticity of Substitution

Production Function or CES

Implies, that any change in the input factors,

results in the constant change in the output.
In CES, the elasticity of substitution is
constant and may not necessarily be equal to
one or unity.
 Short-term Production Function ( Law of Variable Proportion)

short run production function assumes there

is at least one fixed factor input

Diminishing Returns

 In the short run, the law of

diminishing returns states
that as more units of a
variable input are added to
fixed amounts of land and
capital, the change in total
output will first rise and then
fall
 Diminishing returns to labor
occurs when marginal
product of labor starts to
fall. This means that total
output will be increasing at a
decreasing rate
 Long-term Production Function (Law of Returns to scale)
In the long run production function, the relationship between input and output is explained under
the condition when both, labor and capital, are variable inputs.
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