Economics For Managers
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Chapter 4 : Production Function
Production Function
Concepts Of Product
Total Product
Average Product
Marginal Product (MP)
The Three Stages Of Production
Short Run And Long Run
Technological Change
Returns To Scale
Production With One Variable Input
Diminishing Marginal Returns
Relationships among the Product Functions
Production With Two Variable Inputs The Production Isoquant
The Production Isocost
Least Cost Combination
Expansion Path
Chapter Summary
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Firms try to maximize production with the resources
available at a particular period of time. They try to gain maximum benefits from
the combination of their fixed and variable factors of production. The
relationship that explains the combination of the variables and the output can
be referred to as the production function. There are three concepts of product –
total, average and marginal product. Total product refers to the total amount of
output produced using a given quantity of the factor, assuming other factors to
be constant.
Average product is defined as the total product per unit of factor employed in
the production process. The marginal product of an input is the extra output
added by one extra unit of that input, while other inputs are held constant. The
short run is a period in which variable factors such as labor and material can
be changed to adjust the production but one cannot change fixed factors such as
capital. |
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The long run is a period that is sufficient enough to change all factors of
production including capital, etc. to adjust production levels. Returns to
scale refers to the responsiveness of the total product when all the inputs
are changed proportionately. There are three different cases of returns to
scale – increasing, constant and decreasing.
The optimum combination of output that a firm can produce with its given
level of resources is graphically represented by an isoquant curve.
At each level of output, the various combinations of cost are represented by
an isocost line. With the help of isoquants and isocosts, managers can
decide upon the best combination of inputs that will enable them to produce
the maximum level of output at the minimum cost.
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