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Production function for Managerial Economics Mcom Delhi University

Production function for Managerial Economics Mcom Delhi University

Production function for Managerial Economics Mcom Delhi University

Theory of production

Production theory is the study of production, or the economic process of producing outputs from the inputs. Production uses resources to create  a good or service that  are  suitable  for  use  or exchange in a market economy. This can include manufacturing, storing, shipping, and packaging. Some economists define production broadly as all economic activity other than consumption. They see every commercial activity other than the final purchase as some form of production.

Production is a process, and as such it occurs through time and space. Because it is a flow concept, production is measured as a “rate of output per period of time”. There are three aspects to production processes:

  1. The quantity of the good or service
  2. The form of the good or service
  3. The temporal and spatial distribution of the good or service

A production process can be defined as any activity that increases the similarity between the pattern of demand for goods and services, and the quantity, form, shape, size, length and distribution of these goods and services available to the market place.

Production is a process of combining various material inputs and immaterial inputs (plans, know-how) in order to make something for consumption (the output). It is the act of  creating output,  a good or service which has value and contributes to the utility of individuals.

Production function for Managerial Economics Mcom Delhi University

Production Function

  • In economics, a production function relates physical output of a production process to physical inputs or factors of
  • It is a mathematical function that relates the maximum amount of output that can be obtained from a given number of inputs – generally capital and
  • The production function, therefore, describes a boundary or frontier representing the limit of output obtainable from each feasible combination of
  • Firms use the production function to determine how much output they should produce given the price of a good, and what combination of inputs they should use to produce given the price of capital and
  • Increasing marginal costs can be identified using the production function. If a firm has a production function Q=F(K,L) (that is, the quantity of output (Q) is some function of capital (K) and labor (L)), then if 2Q<F(2K,2L), the production function has increasing marginal costs and diminishing returns to scale. Similarly, if 2Q>F(2K,2L), there are increasing returns to scale, and if 2Q=F(2K,2L), there are constant returns to

Production function for Managerial Economics Mcom Delhi University

Examples of Common Production Functions

  • One very simple example of a production function might be Q=K+L, where Q is the quantity of output, K is the amount of capital, and L is the amount of labor used in production. This production function says that a firm can produce one unit of output for every unit of capital or  labor  it employs. From this production function we can see that this industry has constant returns to scale – that is, the amount of output will increase proportionally to any increase in the amount of
  • Another common production function is the Cobb-Douglas production function. One example of  this type of function is Q=K5L0.5. This describes a firm that requires the least total number of inputs when the combination of inputs is relatively equal. For example, the firm could produce 25 units of output by using 25 units of capital and 25 of labor, or it could produce the same 25 units of output with 125 units of labor and only one unit of capital.
  • Finally, the Leontief production function applies to situations in which inputs must be used in fixed proportions; starting from those proportions, if usage of one input is increased without another being increased, output will not change. This production function is given by Q=Min(K,L). For example, a firm with five employees will produce five units of output as long as it has at least five units of

Factors of production

  • Economic resources are the goods or services available to individuals and businesses used to produce valuable consumer
  • The classic economic resources include land, labor and capital. Entrepreneurship is also considered an economic resource because individuals are responsible for creating businesses and moving economic resources in the business
  • These economic resources are also called the factors of production. The factors of production describe the function that each resource performs in the business


  • Land is the economic resource encompassing natural resources found within the
  • This resource includes timber, land, fisheries, farms and other similar natural
  • Land is usually a limited resource for many economies. Although some natural resources, such as timber, food and animals, are renewable, the physical land is usually a fixed resource.
  • Nations must carefully use their land resource by creating a mix of natural and industrial uses.
  • Using land for industrial purposes allows nations to improve the production processes for turning natural resources into consumer


  • Labor represents the human capital available to transform raw or national resources into consumer goods.Human capital includes all individuals capable of working in the economy and providing various services to other individuals or
  • This factor of production is a flexible resource as workers can be allocated to different areas of the economy for producing consumer goods or
  • Human capital can also be improved through training or educating workers to complete technical functions or business tasks when working with other economic


  • Capital has two economic definitions as a factor of
  • Capital can represent the monetary resources companies use to purchase natural resources, land and other capital
  • Monetary resources flow through a economy as individuals buy and sell resources to individuals and businesses.
  • Capital also represents the major physical assets individuals and companies use when producing goods or services. These assets include buildings, production facilities, equipment, vehicles and other similar
  • Individuals may create their own capital production resources, purchase them from another individual or business or lease them for a specific amount of time from individuals or other businesses.


  • Entrepreneurship is considered a factor of production because economic resources can exist in an economy and not be transformed into consumer
  • Entrepreneurs usually have an idea for creating a valuable good or service and assume the risk involved with transforming economic resources into consumer
  • Entrepreneurship is also considered a factor of production since someone must complete the managerial functions of gathering, allocating and distributing economic resources or consumer products to individuals and other businesses in the economy.

Production function for Managerial Economics Mcom Delhi University

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Production function for Managerial Economics Mcom Delhi University

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