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SIDDHANT KARKI
BBA 5th SEMESTER(M)
ROLL NO: 0041701708
1. The production function relates the output of a firm to the amount of inputs, typically
capital and labor.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. (In specialized long-run models, the firm may choose its capital
investments to choose among production technologies.)
The EconModel application The Demand for Labor emphasize the role of the production
function and marginal product in determining the profit-maximizing demand for labor.
By assuming that the maximum output technologically possible from a given set of inputs
is achieved, economists using a production function in analysis are abstracting from the
engineering and managerial problems inherently associated with a particular production
process. The engineering and managerial problems of technical efficiency are assumed to
be solved, so that analysis can focus on the problems of allocative efficiency. The firm is
assumed to be making allocative choices concerning how much of each input factor to
use and how much output to produce, given the cost (purchase price) of each factor, the
selling price of the output, and the technological determinants represented by the
production function. A decision frame in which one or more inputs are held constant may
be used; for example, capital may be assumed to be fixed (constant) in the short run, and
labour and possibly other inputs such as raw materials variable, while in the long run, the
quantities of both capital and the other factors that may be chosen by the firm are
variable. In the long run, the firm may even have a choice of technologies, represented by
various possible production functions.
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 reflected in the function. But
the production function is not a full model of the production process: it deliberately
abstracts from inherent aspects of physical production processes that some would argue
are essential, including error, entropy or waste. Moreover, production functions do not
ordinarily model the business processes, either, ignoring the role of management. (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 allocative 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.