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Production function

In simple words, production is a process of converting physical input into physical output. The relationship between input and output expressed in the form of a mathematical equation is called the production function. It states the maximum amount of output that can be produced with the given amount of inputs or minimum inputs needed to produce a given quantity of output. Inputs refer to the factor services which are used in production i.e. land, labour, capital and enterprise. Output refers to the volume of goods produced. The production function is given as:
 
Q = f (L1, L2, K, O)
 
Where,
Q = Quantity produced
L1 = Land
L2 = Labour
K = Capital
O = Organization
 
The production function can be classified into two groups/categories.
  • Short run production function: Short run is a period of time which is too short for a firm to install a new capital equipment to increase production. In the short run, production will increase when more units of variable factors are used with fixed factors. In short run, at least one factor is fixed. Short run production function is known as “Law of Variable Proportions”. Factors are divided into two parts. Namely:-
  • …Fixed inputs: are those factors, the quantity of which remains constant irrespective of the level of output produced by a firm. Ex., land, building, etc.
  • …Variable inputs: are those factors, the quantity of which varies (only to a limited extent) with variations in the levels of output produced by a firm. Ex, Wages, power, working hours of the labourers etc.
  • ƒLong run production function: Long run is a period of time in which all the factors of production are variable. Long run production function is known as the “law of returns to scale”.




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