Do you ever consider the origins of the goods you purchase at the market, such as journals, pens and pencils, clothing, cereal, milk, fruits, veggies, etc? Customers are a segment of the market who buy goods and services to satisfy their needs. A producer or firm combines a variety of inputs, such as land, labour, capital, entrepreneurship, and other inputs, such as raw materials and fuel, to generate the products and services that customers want. It is interesting to know that, factually humans can neither produce a physical product nor can they destroy it. All we can do is change its form. The act of producing something involves contributing or generating something beneficial. Any procedure that makes a product more useful is referred to as production. In this post, you will learn about production functions, the types of production functions, how they work, and much more.
What is Production?
Production is a process that a business uses to turn inputs into outputs. It is the procedure of producing goods and providing services with the aid of inputs or production factors in order to satisfy human needs. In other terms, production is a general term for the "transformation of inputs into output" when value is added. Input is anything that is utilised in the creation of a commodity. For instance, the use of machinery, raw materials, labor, and other things are inputs in the production of a car. The relationship between a commodity's inputs and outputs depends on its technological status since new technology enables producers to create more with the same amount of inputs or the same amount of output with fewer inputs.
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Fixed and Variable Factors
Fixed factors are those production inputs whose quantity can not be changed with the change in output. For instance, it is not possible to change a large amount of land, equipment, etc., to produce more output.
Contrarily, variable production factors are those whose amount is easily influenced by changes in output level. For instance, we may quickly alter the labour force to boost or lower productivity.
Level and Scale of Production
Any company's level of output rises when it increases production by boosting the amount of one-factor input while maintaining the quantity of the other factor inputs. However, the scale of production increases when a firm raises production by concurrently and proportionately growing the quantity of all the production elements.
Definition of the Production Function
The physical link between inputs and outputs is referred to as the production function in economics. In another way, a production function is a mathematical relationship involving inputs and output that enables the maximum output to be created with a specific set of input factors and technological capabilities at a specific time, such as real estate, labour capital, and entrepreneurship.
Production function can be stated as
Qx = f (L, K)
Suppose there are two-factor inputs: labour (L) and capital (K). Qx is the quantity of output of commodity x, f is the function, L is the unit of labour and k is the unit capital. According to this, the amount of output depends on the labour and capital inputs utilised in manufacturing.
Here, there are two things to think about. First, the production function must be taken into account in relation to a specific time frame, such as a short term and a long period. Second, the state of technology affects how well manufacturing functions. It's vital to remember that a production function merely depicts the physical relationship and has no financial value.
Short Run and Long Run Production Function
The term "short run" describes a period of time during which a company does not have enough time to grow the scale of output. Only by raising the amount of a variable element and utilising the fixed factors that are already in place can it raise the output level.
The term "long run," on the other hand, corresponds to the amount of time over which businesses can raise the size of their output by raising the quantity of all of their inputs concurrently and in an identical ratio.
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Short Run Production Function
A short run production function is one that illustrates the variation in output when only one factor is altered while the other stays the same. In the production function example given above, labour (L) is the variable factor that can be altered to affect the level of output. The second factor, capital (K), is a constant that cannot be altered. The "Law of Variable Proportion or Returns to a Factor" serves as the foundational principle for the short run production function.
An agricultural company, for instance, has 10 labour units and six acres of land. Here, labour is the variable factor, whereas land is the constant factor. On its property (constant factor), the company uses a single unit of labour ( variable factor) at first. The land-labour ratio is therefore 6 to 1. The land-labour ratio changes to a 6: 2 or 3: 1 ratio if the company uses two units of labour.
Long Run Production Function
When all the production elements can be altered concurrently and in the same ratio, the output is examined using a long run production function. Therefore, throughout time, the size of the business can change depending on whether the production elements are multiplied or diminished.
For instance, the builder can construct new buildings or expand existing buildings, purchase more new machinery and equipment, open additional production unit branches, purchase additional land to increase the firm's size, hire additional skilled workers, modify production and managerial technology, etc.
Over a lengthy period of time, all manufacturing inputs or resources are variable. The producer can build new structures or enlarge existing ones, buy new and more machinery and equipment, set up more production unit branches, purchase additional land to increase the firm's size, employ more and more skilled personnel, alter production and managerial technologies, and so on.
Types of Production function
Depending on how much one input can be substituted for another, there are many types of production functions.
Cobb Douglas Production Function
Charles W. Cobb and Paul H. Douglas, two American economists, developed the Cobb Douglas production function to examine the relationship between input and output. The Cobb-Douglas production function is the kind of production function that allows for some substitution of one input by other sources. For instance, capital and labour can be substituted for one another, but only to a certain extent. This is how the Cobb Douglas production function can be represented mathematically:
Q = AK^a L^b ( here, A is a positive constant, and a and b are positive fractions )
Leontief Production Function
The W. Wassily Leontif-developed Leontief production function uses a set ratio of inputs with no sustainability between them. It means that the Leontief production function exists if the input-output ratio is free of the production scale. It presumes that the production factors are strictly complementary. The fixed proportion production function is another name for the Leontief production function. The following is an expression for this production function:
q = min (z1/a, z2/b)
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CES Production Function
Constant Elasticity Substitution is referred to as CES. The output is constantly changing as a result of changes in the production's input, as seen by the CES production function. It is expressed as :
Q = A [aK^–β (1–a) L^–β] ^–1/β
Features of Production Function
The following are the primary features of production function: -
Sustainability
Because of substitutability, any output's quantity can fluctuate while other elements remain constant, even if only by a small amount.
Complementary
As a result, a producer may combine the input factors to make the output. The output cannot be generated if any input is null in quantity.
Specificity
In order to produce a given product, for instance, raw materials, skilled labour, tools, and equipment may be used. All of these production-related characteristics can be used to create other goods. Thus they are not entirely specialised.
Production Period
Any kind of product production takes time. Production is only conceivable over the long term. The variation in input amount is what causes the variance in total output in the production function. A single input's volume might be reachable in a brief amount of time.
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Conclusion:
In this blog post, we learned that the Production Function is the actual connection between inputs and outputs and that production is the process that a firm utilises to transform inputs into outputs. Additionally, we studied the significance of the short run and long run production functions. How much one input can be replaced by another affects the three different types of production functions (Cobb Douglas production function, Leontief production function, and CES production function). Additionally, we examined the sustainability, complementarity, distinctiveness, and production period, which are the four fundamental characteristics of the production function.
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