Production Function Theory

Introduction to production function theory

Production function is the relation between input and output. Production function is the name given to the relationship between the rates of input of productive services and the rate of output of a product. Thus, the production function expresses the relationship between the quantity of output and the quantities of various inputs used for the production.

Two Aspects of Production Function Theory

The two aspects which are stressed under production function theory are

( 1 ) Maximum quantity of output can be produced from any chosen quantities of various inputs

( 2 ) Minimum quantities of various input that are required to yield a given quantity of output

Three Ways of Production Function Theory

The production function theory can be studied in three ways namely

(1) Law of variable proportion where quantities of some factors is kept fixed but the other factors are varied,

(2) Laws of Return to Scale where quantities of all factors is varied and

(3) Optimum combinations of inputs.

Production function can be algebraically expressed as

Q = f ( N , L , K , T ) where Q = quantity of output

N , L , K , T = quantites of inputs

f = unspecified form of functional relationship between N, L , K and T

Practical Importance of Production Function Theory

Production function gives an idea of the optimum level of the output and the optimum employment of the variable inputs.

It tells management the budget constraint for increase in output.

The production function theory explains the degree of substitution of different factors of production.

The management should endeavour to produce an upward shift in production function which can definitely improve its financial performance under the given market conditions.

The theory of production function can also explain the possibility of disguised unemployment.

Check this awesome Profit Formula i recently used.

As production function is an engineering concept, one can study the behaviour of production function under different conditions.

by: Smith

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