Q3. Explain production function. How is it useful for business?

Ans: Production function states the relationship between input or output i.

e., the maximum amount of output that can be produced with given
quantities of input under a given state of technical knowledge. The output
takes the form of volume of goods or services and the input are the different
factors of production i.e., land, capital and enterprise. It is important to keep
in mind that the production function describes technology, not economic
behavior. A firm may maximize its profits given its production function, but
generally takes the production function as a given element of that problem.

Concept of production functions:-

In micro-economics, a production function is a function that
specifies the output of a firm, an industry, or an entire economy for all
combinations of inputs. A meta-production function (sometimes met
production function) compares the practice of the existing entities converting
inputs X into output y to determine the most efficient practice production
function of the existing entities, whether the most efficient feasible practice
production or the most efficient actual practice production. In either case, the
maximum output of a technologically-determined production process is a
mathematical function of input factors of production.
Put another way, given the set of all technically feasible combinations
of output and inputs, only the combinations encompassing a maximum
output for a specified set of inputs would constitute the production function.
Alternatively, a production function can be defined as the specification of the
minimum input requirements needed to produce designated quantities of
output, given available technology. It is usually presumed that unique
production functions can be constructed for every production technology.
The relationship of output to inputs is non-monetary, that is, a
production function relates physical inputs to physical outputs, and prices
and costs are not considered. But, the production function is not a full model
of the production process: it deliberately abstracts away from essential and
inherent aspects of physical production processes, including error, entropy or
waste. Moreover, production functions do not ordinarily model the business
processes, either, ignoring the role of management, of sunk cost investments
and the relation of fixed overhead to variable costs. (For a primer on the
fundamental elements of microeconomic production theory, see production
theory basics).
The primary purpose of the production function is to address allocate
efficiency in the use of factor inputs in production and the resulting
distribution of income to those factors. Under certain assumptions, the
production function can be used to derive a marginal product for each factor,
which implies an ideal division of the income generated from output into an
income due to each input factor of production.
Production function useful for business--
Firms try to maximize production with the resources available at a particular
period of time. They try to gain maximum benefits from the combination of
their fixed and variable factors of production. The relationship that explains
the combination of the variables and the output can be referred to as the
production function. There are three concepts of product – total, average and
marginal product. Total product refers to the total amount of output
produced using a given quantity of the factor, assuming other factors to be
constant.
Average product is defined as the total product per unit of factor
employed in the production process. The marginal product of an input is the
extra output added by one extra unit of that input, while other inputs are
held constant. The short run is a period in which variable factors such as
labor and material can be changed to adjust the production but one cannot
change fixed factors such as capital.
The long run is a period that is sufficient enough to change all factors
of production including capital, etc. to adjust production levels. Returns to
scale refers to the responsiveness of the total product when all the inputs
are changed proportionately. There are three different cases of returns to
scale– increasing, constant and decreasing.
The optimum combination of output that a firm can produce with its given
level of resources is graphically represented by an is quant curve.