# Economics

THE PRODUCTION FUNCTION

The Production Function

A function that defines the maximum amount of output that can be produced with a given set of inputs is called production function.

Mathematically production function is expressed by:

Q = f (K, L)

Whereas Q represents output and K and L represent capital and labor respectively.

Production Function Table
K             L           Q
1             0           0
50           1         50
40           2         75
32           3         120
25           4         150
20           5         200
17           6         240
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The Discrete Production Function: This involves distinct or lumpy patterns of input combination.
Continuous Production Function: Where inputs can be varied.
Short-run Vs Long-Run Decisions

Returns to Scale
The effect on output because of a proportional increase in all inputs. This is a long-rum phenomenon.
Returns to Factor
The effect on output because of variation in only one input, a short-run phenomenon of production function.

Short-Run Production Function Analysis

In the short-run it is assumed that production is only a function of labor.

Q = f (K*, L)

Measurement of Productivity

Total Product: whole output from a production system
Average Product   = Q/L
Marginal Product   MPL= ΔQ/ΔL
MPk = ΔQ/ΔK

[pic]

Graphs

Three points A,B,and C on Total product graph are important. Point A is the inflection point of the TP curve.The MP of L increases till this point reaches, then it declines.
At point B AP and MP are equal, and AP is maximum.
At point C the slope of the TP is zero and the curve is at maximum. Beyond C point MP is negative and TP is reduced.

The Law of Diminishing Marginal product of Labor in the short run

The law states...