Question

What is a production function? What does it describe? How is it used?

Answer 1

In economics, a production function relates physical output of a production process to physical inputs or factors of production. It is a mathematical function that relates the maximum amount of output that can be obtained from a given number of inputs – generally capital and labor. The production function, therefore, describes a boundary or frontier representing the limit of output obtainable from each feasible combination of inputs.

Firms use the production function to determine how much output they should produce given the price of a good, and what combination of inputs they should use to produce given the price of capital and labor. When firms are deciding how much to produce they typically find that at high levels of production, their marginal costs begin increasing. This is also known as diminishing returns to scale – increasing the quantity of inputs creates a less-than-proportional increase in the quantity of output. If it weren’t for diminishing returns to scale, supply could expand without limits without increasing the price of a good.

The producer secures the best combination by applying the principles of equi-marginal returns and substitution. According to the principle of equi-marginal returns, any producer can have maximum production only when the marginal returns of all the factors of production are equal to one another. For instance, when the marginal product of the land is equal to that of labour, capital and organisation, the production becomes maximum.