# Production Function

The

firm’s production function for a particular good (q) shows the maximum amount of the good that can be produced using alternative combinations of capital (K) and labor (L ) q = f(K,L)

**Marginal Physical Product
**

To

study variation in a single input, we define marginal physical product as the additional output that can be produced by employing one more unit of that input while holding other inputs constant

∂q marginal physical product of capital = MPK = = fK ∂K ∂q marginal physical product of labor = MPL = = fL ∂L

we assume diminishing marginal productivity
∂MPK ∂ 2q = = fKK < 0 ∂K ∂K ∂MPL ∂ 2q = = fLL < 0 ∂L ∂L
.Diminishing Marginal Productivity
The
marginal physical product of an input depends on how much of that input is used In general.

Diminishing Marginal Productivity
Because
of diminishing marginal productivity. 19th century economist Thomas Malthus worried about the effect of population growth on labor productivity But changes in the marginal productivity of labor over time also depend on changes in other inputs such as capital.
.

Average Physical Product
Labor
productivity is often measured by average productivity
output q f (K . L ) APL = = = labor input L L
Note
that APL also depends on the amount of capital employed
.

000L2 . we must assume a value for K
Let
K = 10 q = 60.L) = 600K 2L2 .1000L3
The
production function becomes
.A Two-Input Production Function
Suppose
the production function for flyswatters can be represented by
q = f(K.K 3L3
To
construct MPL and APL.

3000L2
which diminishes as L increases This implies that q has a maximum value:
120.A Two-Input Production Function
The
marginal productivity function is
MPL = ∂ q/∂ L = 120.000L .3000L2 = 0 40L = L2 L = 40
Labor
input beyond L=40 reduces output
.000L .

000 .2000L = 0 L = 30
. we hold K=10 and solve
APL = q/L = 60.000L .1000L2
APL
reaches its maximum where
∂ APL/∂ L = 60.A Two-Input Production Function
To
find average productivity.

000 when APL is at its maximum.A Two-Input Production Function
In
fact.
. APL and MPL are equal
Thus. when L=30. both APL and MPL are equal to 900.

we use an isoquant map An isoquant shows those combinations of K and L that can produce a given level of output (q0) f(K.L) = q0
.Isoquant Maps
To
illustrate the possible substitution of one input for another.

Isoquant Map
Each
isoquant represents a different level of output
output
rises as we move northeast
K per period
q = 30 q = 20
L per period
.

slope = marginal rate of technical substitution (MRTS)
A B KB
K per period
KA
MRTS > 0 and is diminishing for increasing inputs of labor
q = 20
LA
LB
L per period
.Marginal Rate of Technical Substitution (MRTS)
The
slope of an isoquant shows the rate at which L can be substituted for K
.

would output double? Returns to scale have been of interest to economists since the days of Adam Smith
.Returns to Scale
How
does output respond to increases in all inputs together? Suppose that all inputs are doubled.

Returns to Scale
Smith
identified two forces that come into operation as inputs are doubled
greater
division of labor and specialization of
labor loss in efficiency because management may become more difficult given the larger scale of the firm
.

L) Returns to Scale Constant Decreasing Increasing
.mL) = mf(K.Returns to Scale
If
the production function is given by q = f(K.L) and all inputs are multiplied by the same positive constant (m > 1).mL) > mf(K.mL) < mf(K. then
Effect on Output f(mK.L) f(mK.L) f(mK.

Returns to Scale
It
is possible for a production function to exhibit constant returns to scale for some levels of input usage and increasing or decreasing returns for other levels
economists
refer to the degree of returns to scale with the implicit notion that only a fairly narrow range of variation in input usage and the related level of output is being considered
.

not the scale of operation all of the isoquants are “radial blowups” of the unit isoquant
Geometrically.Constant Returns to Scale
Constant
returns-to-scale production functions have the useful theoretical property that that the MRTS between K and L depends only on the ratio of K to L.
.

the RTS will be the same on all isoquants
The isoquants are equally spaced as output expands
q=3 q=2 q=1
K per period
L per period
.Constant Returns to Scale
Along
a ray from the origin (constant K/L).

Xn)=mkq
If
k=1.X2.X2.…. we have constant returns to scale If k<1.Xn)
If
all inputs are multiplied by a positive constant m. we have decreasing returns to scale If k>1. we have increasing returns to scale
.mXn) = mkf(X1.mX2.….Returns to Scale
Returns
to scale can be generalized to a production function with n inputs
q = f(X1. we have
f(mX1.….

L) = aK + bL
production function exhibits constant returns to scale isoquants are straight lines
is constant
f(mK.The Linear Production Function
Suppose This
that the production function is
q = f(K.mL) = amK + bmL = m(aK + bL) = mf(K.L)
All
MRTS
.

The Linear Production Function
Capital and labor are perfect substitutes
K per period
MRTS is constant as K/L changes
slope = -b/a
q1
q2
q3
L per period
.

Fixed Proportions
No substitution between labor and capital is possible
K per period
K/L is fixed at b/a
q3/a q2 q1 q3/b
q3
L per period
.

mL) = A(mK)a(mL) b = Ama+b KaLb = ma+bf(K.a.b > 0
production function can exhibit any returns to scale
f(mK.Cobb-Douglas Production Function
Suppose This
that the production function is
q = f(K.L) if a + b = 1 ⇒ constant returns to scale if a + b > 1 ⇒ increasing returns to scale if a + b < 1 ⇒ decreasing returns to scale
.L) = AKaLb A.

5 L0.Cobb-Douglas Production Function
Suppose
that hamburgers are produced according to the CobbDouglas function
q = 10K 0.5 ⇒ KL = 100
a+b=1 ⇒ constant returns to
.5 L0.5 ⇒ KL = 25 q = 100 = 10K 0.5 L0.5
Since
scale The isoquant map can be derived
q = 50 = 10K 0.

5 K MRTS ( L for K ) = = 0.Cobb-Douglas Production Function
The
MRTS can easily be calculated
f L 5 L−0.5 = f K 5L K L
The
MRTS declines as L rises and K falls The MRTS depends only on the ratio of K and L
.5 −0.5 K 0.