The Production Function

1. The Production Function

2. The production function is the relationship between the quantity of inputs a firm uses and the quantity of output it produces.

3. Inputs and outputs • Two types of inputs • Fixed input • It is an input whose quantity is fixed for a period of time and cannot be varied. • Variable input • An input whose quantity the firm can vary at anytime. • In reality, whether or not the quantity of an input is really fixed depends on the time horizon.

4. Runs • Two types of runs • Long run • Given a long enough period of time has elapsed firms can adjust the quantity of any input. • There are no fixed inputs in the long run • Short run • Is defined as the time period during which at least one input is fixed.

5. Total Product Curve • Shows how the quantity of output depends on the quantity of the variable input, for a given quantity of the fixed output • The TPC is not constant as you move to the right it flattens out • This can be explained by the marginal product • The marginal product of an input is the additional quantity of output produced by using one more unit of that input

6. This helps explain the diminishing returns to an input • This means when an increase in the quantity of that input, holding all levels of all other inputs fixed, leads to a decline in the marginal product of that input. • It is import to remember that this is an “other things equal” proposition • Each successive unit of an input will raise production by less than the last if the quantity of all other inputs is held fixed. • Also remember: the position of the total product curve depends on the quantities of other inputs.