Economics (NCERT) Notes

3.1 Production Function

What is production
•Production is the process by which ‘inputs’ are transformed into ‘output’.
•Production is carried out by producers or firms.
•A firm acquires different inputs like labour, machines, land, raw materials etc.
•It uses these inputs to produce output.
•This output can be consumed by consumers, or used by other firms for further production.
•A tailor uses a sewing machine, cloth, thread and his own labour to ‘produce’ shirts.
•A farmer uses his land, labour, a tractor, seed, fertilizer, water etc to produce wheat. 
•A car manufacturer uses land for a factory, machinery, labour, and various other inputs (steel, aluminium, rubber etc) to produce cars.
•A rickshaw puller uses a rickshaw and his own labour to ‘produce’ rickshaw rides.
•A domestic helper uses her labour to produce ‘cleaning services’.
•We assume that production is instantaneous, i.e. no time elapses between the combination of the inputs and the production of the output.
•The terms production and supply are often used synonymously and often interchangeably.
•We also assume that the objective of a firm is to earn the maximum profit that it can.
•Cost of production: The price that a firm is required to pay in order to acquire the inputs.
•Revenue: Once output has been produced, the firm sell it in the market and earns revenue.
•Profit: The difference between the revenue and cost is called the firm’s profit.
Production Function
•The production function of a firm is a relationship between inputs used and output produced by the firm.
•For various quantities of inputs used, it gives the maximum quantity of output that can be produced.
Production Function of a Farmer
•Suppose that a farmer uses only two inputs to produce wheat:
     1. land 
     2. labour.
•Suppose that he uses 2 hours of labour/ day and 1 hectare of land to produce a maximum of 2 tonnes of wheat.
•Then, a function that describes this relation is called a production function.
•One possible example of the form is: q = K × L, Where,
     •q is the amount of wheat produced,
     •K is the area of land in hectares,
     •L is the number of hours of work done in a day.
Technology and Production Function
•Since we are taking the maximum output for any level of inputs, a production function deals only with the efficient use of inputs.
•Efficiency implies that it is not possible to get any more output from the same level of inputs.
•A production function is defined for a given technology.
•It is the technological knowledge that determines the maximum levels of output that can be produced using different combinations of inputs.
•If the technology improves, the maximum levels of output obtainable for different input combinations increase. We then have a new production function.
Factors of Production
•The inputs that a firm uses in the production process are called factors of production.
•A firm may require any number of different inputs.
•However, we consider a firm that produces output using only two factors of production – labour and capital.
•The production function, therefore, tells us the maximum quantity of output (q) that can be produced by using different combinations of these two factors of productions- Labour (L) and Capital (K).
•We may write the production function as q = f(L,K)  
     •where, L is labour and K is capital and q is the maximum output that can be produced.
Production Function 

•Both the inputs are necessary for the production.
•If any of the inputs becomes zero, there will be no production.
•With both inputs positive, output will be positive.
•As we increase the amount of any input, output increases.


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