A Production Function Shows The

31.17 Production Part

The production function characterizes the output of a firm given the inputs information technology uses. The link between inputs and output is shown Figure 31.15 "The Production Role". The product function combines a firm'south physical capital letter stock, labor, raw materials (or intermediate inputs), and technology to produce output. Applied science is the knowledge (the "blueprints") that the business firm possesses, together with managerial skills.

Product functions generally take two of import properties:

Positive marginal product of an input
Diminishing marginal product of an input

By input, we mean whatsoever of the factors of product, such as concrete capital, labor, or raw materials. The marginal product of an input is the extra output obtained if actress input is used. In this conceptual exercise, all other inputs are held fixed so that we modify only 1 input at a time.

The first holding asserts that additional output will be obtained from additional units of an input. Adding another machine, another worker, some more fuel, and so on, increases the output of a firm. A positive marginal product does not necessarily mean that the extra output is profitable: it might exist that the toll of the extra input is high relative to the value of the additional output obtained.

The second belongings explains how the marginal product of an input changes every bit nosotros increase the amount of that input, keeping the quantities of other inputs stock-still. An additional unit of measurement of an input will (usually) increase output more when there is a minor (rather than a big) amount of that input being used. For example, the extra output obtained from calculation the first machine is greater than the additional output obtained from adding the 50th machine.

A simple production function relating output to labor input is shown in Figure 31.16 "Labor Input in the Production Function". This figure illustrates the two properties of positive and diminishing marginal product of labor. Equally more labor is added, output increases: there is a positive marginal product of labor (that is, the slope of the relationship is positive). But the extra output obtained from adding labor is greater when the labor input is low: there is diminishing marginal product of labor. From the graph, the slope of the production role (which is the marginal product of labor) is greater at low levels of the labor input.

Central Insights

The product function shows the output produced by a firm given its inputs.
The production office displays ii important properties: positive marginal product and diminishing marginal product.

Figure 31.xv The Production Role