PRODUCTION
PRODUCTION FUNCTION: The term
economists use to describe the technology of
production, i.e., the relationship between
inputs and the output of a good or service.
Production
slide 1
There is a production function for every good that
shows the maximum output you can get from any
quantities of inputs. The production function is
the description of the current best technology for
making a good.
Production functions apply to firms. E.g., MSU has
a production function for producing alfalfa. GM
has a production function for producing Chevy’s.
Production
slide 2
TOTAL PRODUCT CURVE
The total product curve shows output as a function of
a single variable input, holding all other inputs
constant.
Production
slide 3
The production function for tax returns in a small
accounting firm can be written like this:
Q(returns) = f(office space, accountants,
computers, furniture, supervisors, office
supplies, etc.)
The dependent variable is quantity of output
(number of returns filed in this case).
The independent variables are quantities of
inputs.
Production
slide 4
Here’s a table of values for tax return production
as a function of a single variable input,
LABOR:
Total
Labor Product
0
0
1
3
2
15
3
36
4
48
5
56
6
62
7
66
8
68
Production
slide 5
Total product curve for tax returns
as a function of the amount of labor
Hidden slide
Q
70
60
50
40
Plot the remaining points
30
20
10
0
0
1
2
3
4
5
6
7
8
9
10
LABOR
Production
slide 6
Marginal product of an input: The change in output per
unit change in input.
Marginal product is the slope of the total product curve:
Q/ L
Marginal product is a measure of input productivity.
Production
slide 8
Labor
0
1
2
3
4
5
6
7
8
Total
Product
0
3
15
36
48
56
62
66
68
Marginal
Product
3
12
21
12
(48-36)/
(4-3)
The marginal product curve shows the marginal
product as a function of the quantity of labor used.
The independent variable is the amount of the input
(labor).
The dependent variable is the marginal product of labor.
Production
slide 10
Plot the remaining points showing
MP here, and connect them.
Label the axes correctly.
Hidden slide
22
20
18
16
14
12
10
8
6
4
2
0
0
Production
2
4
6
8
10
slide 11
Law of Diminishing Returns
As the amount of an input increases, all other inputs
being held constant, the marginal product of the
input will eventually decline.
Production
slide 13
Q
80
70
60
50
40
30
20
10
0
TP
Total Product Curve
0
1
2
3
4
5
6
7
8
9 10
L
The Law of Diminishing
Returns says the the total
product curve eventually
gets flatter as the amount of
the variable input increases.
MP
22
20
18
16
14
12
10
8
6
4
2
0
Marginal Product Curve
MP
0
2
Production
4
6
8
10
L
slide 14