Production is the result of co-operation of four factors of production viz., land, labour, capital and organization.
This is evident from the fact that no single commodity can be produced without the help of any one of these four factors of production.
Therefore, the producer combines all the four factors of production in a technical proportion. The aim of the producer is to maximize his profit. For this sake, he decides to maximize the production at minimum cost by means of the best combination of factors of production.
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.
Production function refers to the functional relationship between the quantity of a good produced (output) and factors of production (inputs).
“The production function is purely a technical relation which connects factor inputs and output.” Prof. Koutsoyiannis
Defined production function as “the relation between a firm’s physical production (output) and the material factors of production (inputs).” Prof. Watson
In this way, production function reflects how much output we can expect if we have so much of labour and so much of capital as well as of labour etc. In other words, we can say that production function is an indicator of the physical relationship between the inputs and output of a firm.
The reason behind physical relationship is that money prices do not appear in it. However, here one thing that becomes most important to quote is that like demand function a production function is for a definite period.
It shows the flow of inputs resulting into a flow of output during some time. The production function of a firm depends on the state of technology. With every development in technology the production function of the firm undergoes a change.
The new production function brought about by developing technology displays same inputs and more output or the same output with lesser inputs. Sometimes a new production function of the firm may be adverse as it takes more inputs to produce the same output.
Mathematically, such a basic relationship between inputs and outputs may be expressed as:
Q = f( L, C, N )
Where Q = Quantity of output
L = Labour
C = Capital
N = Land.
Hence, the level of output (Q), depends on the quantities of different inputs (L, C, N) available to the firm. In the simplest case, where there are only two inputs, labour (L) and capital (C) and one output (Q), the production function becomes.
Q =f (L, C)
“The production function is a technical or engineering relation between input and output. As long as the natural laws of technology remain unchanged, the production function remains unchanged.” Prof. L.R. Klein
“Production function is the relationship between inputs of productive services per unit of time and outputs of product per unit of time.” Prof. George J. Stigler
“The relationship between inputs and outputs is summarized in what is called the production function. This is a technological relation showing for a given state of technological knowledge how much can be produced with given amounts of inputs.” Prof. Richard J. Lipsey
Thus, from the above definitions, we can conclude that production function shows for a given state of technological knowledge, the relation between physical quantities of inputs and outputs achieved per period of time.
Features of Production Function
Following are the main features of production function:
The factors of production or inputs are substitutes of one another which make it possible to vary the total output by changing the quantity of one or a few inputs, while the quantities of all other inputs are held constant. It is the substitutability of the factors of production that gives rise to the laws of variable proportions.
The factors of production are also complementary to one another, that is, the two or more inputs are to be used together as nothing will be produced if the quantity of either of the inputs used in the production process is zero.
The principles of returns to scale is another manifestation of complementarity of inputs as it reveals that the quantity of all inputs are to be increased simultaneously in order to attain a higher scale of total output.
It reveals that the inputs are specific to the production of a particular product. Machines and equipment’s, specialized workers and raw materials are a few examples of the specificity of factors of production. The specificity may not be complete as factors may be used for production of other commodities too. This reveals that in the production process none of the factors can be ignored and in some cases ignorance to even slightest extent is not possible if the factors are perfectly specific.
Production involves time; hence, the way the inputs are combined is determined to a large extent by the time period under consideration. The greater the time period, the greater the freedom the producer has to vary the quantities of various inputs used in the production process.
In the production function, variation in total output by varying the quantities of all inputs is possible only in the long run whereas the variation in total output by varying the quantity of single input may be possible even in the short run.
Time Period and Production Functions
The production function is differently defined in the short run and in the long run. This distinction is extremely relevant in microeconomics. The distinction is based on the nature of factor inputs.
Those inputs that vary directly with the output are called variable factors. These are the factors that can be changed. Variable factors exist in both, the short run and the long run. Examples of variable factors include daily-wage labour, raw materials, etc.
On the other hand, those factors that cannot be varied or changed as the output changes are called fixed factors. These factors are normally characteristic of the short run or short period of time only. Fixed factors do not exist in the long run.
Consequently, we can define two production functions: short-run and long-run. The short-run production function defines the relationship between one variable factor (keeping all other factors fixed) and the output. The law of returns to a factor explains such a production function.
For example, consider that a firm has 20 units of labour and 6 acres of land and it initially uses one unit of labour only (variable factor) on its land (fixed factor). So, the land-labour ratio is 6:1. Now, if the firm chooses to employ 2 units of labour, then the land-labour ratio becomes 3:1 (6:2).
The long-run production function is different in concept from the short run production function. Here, all factors are varied in the same proportion. The law that is used to explain this is called the law of returns to scale. It measures by how much proportion the output changes when inputs are changed proportionately.
Total Production, Marginal Production, Average Production
Differentiate an input and keep all the other inputs unchanged, then for different degrees of that input we get different degrees of output. This association between the variable input and output, keeping all the other inputs unchanged is often referred to as total product (TP) of the variable input. This is also sometimes termed as the total return or total physical product of the variable input. It will be helpful to elucidate the concepts of average product (AP) and marginal product (MP). They are useful in order to explain the contribution of the variable inputs to the production procedure.
The function that explains the relationship between physical inputs and physical output (final output) is called the production function. We normally denote the production function in the form:
Q = f(X1, X2)
Q Represents the final output.
X1 and X2 are inputs or factors of production.
Total Product as the total volume or amount of final output produced by a firm using given inputs in a given period of time.
Total product of a factor is the amount of total output produced by a given amount of the factor, other factors held constant. As the amount of a factor increases, the total output increases.
The additional output produced as a result of employing an additional unit of the variable factor input is called the Marginal Product. Thus, we can say that marginal product is the addition to Total Product when an extra factor input is used.
Marginal Product = Change in Output/ Change in Input
It is defined as the output per unit of factor inputs or the average of the total product per unit of input and can be calculated by dividing the Total Product by the inputs (variable factors).
Average Product = Total Product/ Units of Variable Factor Input
Relationship between Average Product and Marginal Product
There exists an interesting relationship between Average Product and Marginal Product. We can summarize it as under:
- When Average Product is declining, Marginal Product lies below Average Product.
- When Average Product is rising, Marginal Product lies above Average Product.
- At the maximum of Average Product, Marginal and Average Product equal each other.
Relationship between Marginal Product and Total Product
The law of variable proportions is used to explain the relationship between Total Product and Marginal Product. It states that when only one variable factor input is allowed to increase and all other inputs are kept constant, the following can be observed:
- When the MP declines but remains positive, the Total Product is increasing but at a decreasing rate. This give ends the Total product curve a concave shape after the point of inflexion. This continues until the Total product curve reaches its maximum.
- When the Marginal Product (MP) increases, the Total Product is also increasing at an increasing rate. This gives the Total product curve a convex shape in the beginning as variable factor inputs increase. This continues to the point where the MP curve reaches its maximum.
- When the MP becomes zero, Total Product reaches its maximum.
- When the MP is declining and negative, the Total Product declines.