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Managerial Economics - Production Analysis

Production Function - Production Analysis

   Posted On :  29.05.2018 12:14 am

Production function indicates the maximum amount of commodity ‘X’ to be produced from various combinations of input factors.

Production Function
 
Production function indicates the maximum amount of commodity ‘X’ to be produced from various combinations of input factors. It decides on the maximum output to be produced from a given level of input, and how much minimum input can be used to get the desired level of output. The production function assumes that the state of technology is fixed. If there is a change in technology then there would be change in production function.

Q = f (Land, Labour, Capital, Organization)
 
Q = f (L, L, C, O)
 
The production manager’s responsibility is that of identifying the right combination of inputs for the decided quantity of output. As a manager ,he has to know the price of the input factors and the budget allocation of the organization. The major objective of any business organization is maximizing the output with minimum cost. To achieve the maximum output the firm has to utilize the input factors efficiently. In the long run, without increasing the fixed factors it is not possible to achieve the goal. Therefore it is necessary to understand the relationship between the input and output in any production process in the short and long run.
 

Cobb Douglas Production Function:

 
This is a function that defines the maximum amount of output that can be produced with a given level of inputs. Let us assume that all input factors of production can be grouped into two categories such as labour (L)   and capital (K).The general equilibrium for the production function is 
Q = f (K, L)

There are various functional forms available to describe production. In general Cobb-Douglas production function (Quadratic equation) is widely used


Q = the maximum rate of output for a given rate of capital (K) and labour (L).

Short Run Production Function:

 
In the short run, some inputs (land, capital) are fixed in quantity. The output depends on how much of other variable inputs are used. For example if we change the variable input namely (labour) the production function shows how much output changes when more labour is used. In the short run producers are faced with the problem that some input factors are fixed. The firms can make the workers work for longer hours and also can buy more raw materials. In that case, labour and raw material are considered as variable input factors. But the number of machines and the size of the building are fixed. Therefore it has its own constraints in producing more goods.

 In the long run all input factors are variable. The producer can appoint more workers, purchase more machines and use more raw materials. Initially output per worker will increase up to an extent. This is known as the Law of Diminishing Returns or the Law of Variable Proportion. To understand the law of diminishing returns it is essential to know the basic concepts of production.
 

 

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