Concept 2
The Production Function
How a business mixes land, labor and capital to get the most output from what it has, written as Q = f(L, K).
As previously mentioned, the Factors of Production are defined as inputs used in production to make an economic profit. The way that these inputs are combined to deliver that output is called the production function. The production function describes the optimal allocation of resources. The way in which companies mix their resources determines their ability to get to optimal efficiency. The discussion of efficiency deals with finding the way that a company can accomplish something with the least amount of time and effort while minimizing waste and producing a product in the fastest manner possible.
The production function focuses on the way that a company can obtain maximum output with a given set of inputs. But it is important to note that there is not a single way to do this. Think about how companies can mix land, labor, and capital to gain advantages over their competitors. The company with the most efficient employees may gain a market advantage for a time. Then another company might figure out how to use capital to be better than the competitor with efficient people. And another competitor yet may find a new advantage with natural resources. Companies are free to mix the factors in any way they see fit to maximize their production output.
A production function is expressed in the quantitative functional formula as follows. Q is the quantity of total output and each letter X is representing the quantity of input for each factor. Ultimately, production is a result of the individual mix of factors of production. It is often expressed as the following formula: Q = f (X1, X2, X3, X4, …, Xn).
A more simplistic view of this formula is the following: Q = f (L, K). This means the quantity of output is derived from a mix of land and capital equipment. This is considered the short run production function. A longer-term production function would involve all of the factors of production. It could be expressed this way: Q = f (N, L, K, T, t). This indicates that the production function in the long run is a result of the combination of land (N, which would include buildings), labor (L), capital (K), technology (T), and time (t). In the long run all of these inputs can be altered. This long-term perspective will be further discussed in Lesson 13, the Marshallian Theory of Production.