Production Functions: Key Concepts and Relationships

Production Functions: Key Concepts

Production Function: The relationship between the quantity of inputs used and the amount of product produced per period, given a state of technology.

Total Product: The total output produced with the combination of fixed and variable factors in a given period.

Average Product: The product value is taken individually. This value arises between the production volume and the quantity of factors employed.

• When the average product grows, the marginal product is greater than the average product.
• When the average product decreases, the marginal product is less than the average product.
• When the average product is at its maximum, the marginal product equals the average product.

Linear Homogeneous Production Functions

Linear homogeneous production functions are a special case of production functions that have the features to show constant returns to scale.

Isoquants

A production isoquant is the locus of all combinations of two inputs, A and B, that can generate a given level of output.

Isoquants that are higher represent a higher output level, using at least an equal quantity of one input and more of the other, or a greater quantity of both. Those that are lower represent a lower level of production for the same reasons.

Economic Region of Production

The economic region of production: If the isoquant map presents the peculiarity that the curves have a section of negative slope, but at the ends change the slope, it is necessary to determine the economic region of production. The upper ridge line joins points on which the marginal rate of technical substitution of B by A is infinite, and the lower ridge line connects points where the marginal rate of technical substitution of B by A is zero.

Isocost Lines

The isocost line shows all combinations of two inputs, A and B, that the producer can obtain when spending a fixed amount of money (CT). This lump sum payment may be called the producer's outlay.

Optimal Combination of Resources

The optimal combination of resources: The producer is in equilibrium when, given the market's monetary outlay and factor prices, it can reach the highest possible isoquant curve.

Expansion Path

The expansion path is defined as the locus of all equilibrium combinations of a producer that occur as output changes and input prices remain constant.

Isoclines

Isoclines are defined as the locus of combinations of points along which the marginal rate of technical substitution is constant.