The Production Function

Stages of Production
Lecture Notes

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 The Production Function

A production function is an expression relating the maximum amount

of a good that can be produced in a time period to various
combinations of labor, capital, natural resources and technology.

Output = ƒ (labor, capital, natural resources, technology)

Economists refer to the resources that are used to produce goods

Note
as inputs or factors.

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Note Most goods are produced from both fixed and variable inputs.

Factors of production that do not vary in

Fixed inputs
quantity with changes in output.

Factors of production that do vary in quantity

Variable inputs
with changes in output.

A plant built to generate electricity is an example of a fixed input, and the

fossil fuel used to generate the electricity is an example of a variable
input.

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Note Fixed inputs can be altered in the long run but not in the short run.

Short run production period so short that only the variable

inputs (usually labor) can be changed.

Long run production period long enough to change the

amounts of all inputs (no inputs are fixed).

The long run is relatively short for a young entrepreneurs; the short
Note run is relatively long for a nuclear power plant that takes years to
build and depreciate.

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Lecture Notes

216
production function in the short run shows how total output changes
when the amount of a single variable input (usually labor) changes
while all other inputs are held constant. The production function in the
short run can be illustrated with a schedule (look at table 11), or with a
graph (look at figure 46).

Both table (11) and figure (46) list hypothetical output as the number of
workers changes from zero to 9. If no workers are used, there is no output.
If the number of workers goes up by one, output rises to 10. Add another
worker and total output rises to 15. We can use this information to
construct the production function that appears as the figure (46), where
the number of variable inputs is shown on the horizontal axis, and total
production on the vertical axis.

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Lecture Notes

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 Total product
120
Total Marginal 110
labor
product product 100
90
0 0 -- Stage 1
80
1 10 10 70 Stage 3
60 Stage 2
2 25 15 50
3 50 25 40
30
4 80 30 20
5 100 20 10
0
6 115 15 1 2 3 4 5 6 7 8 9 10 Labors
Marginal product
7 125 10
8 125 0
9 120 -5
30
10 105 -15

Table (11): short-run production

0
1 2 3 4 5 6 7 8 9 10 Labors

Figure (46): short-run production

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Lecture Notes

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 The law of diminishing returns states that, if one or more inputs are
fixed, beyond some point the addition to output of each successive
unit of a variable input declines.
or

The law of diminishing returns implies that as more units of a variable

input, such as labor, are added to a production process that includes at
least one fixed input, beyond some point total output or total product
begins to increase at decreasing rate.

The law of diminishing returns implies diminishing marginal physical

product.

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Lecture Notes

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 Marginal product or marginal physical product (MPP) is the
Note change in total output (or total product) for a one-unit change in a
variable input.

𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒐𝒖𝒕𝒑𝒖𝒕
MPP =
𝑪𝒉𝒂𝒏𝒈𝒆 𝒊𝒏 𝒐𝒏𝒆 𝒊𝒏𝒑𝒖𝒕
EX.
From previous example:
At the second unit of labor MPP = (25-10)/(2-1) = 10
At the third unit of labor MPP = (50-25)/(3-1) = 25

In the beginning, any increase in labor units, marginal product

Note increase. After a certain amount of labor, any increase in labor
units will decrease marginal product until reach a negative values.

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 The law of diminishing returns implies rising costs and lower
productivity in the short run.

When marginal physical product is declining, it takes more units of

variable input to produce each additional unit of output (leading
to increase the variable costs, therefore the total cost).

Productivity, which is the average product of labor, eventually

declines in the short run if additional units of labor are added to
fixed quantities of capital and natural resources.

In the beginning, any increase in labor units, average product

Note increase. After a certain amount of labor, any increase in labor
units will decrease average product (decrease productivity) and
does not reach a negative values.

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 Stages of Production

In the short run, every firm faces the question of how many workers to
hire. The stages of production help companies determine the most
profitable number of workers to hire. Now look at Figure (46), which
shows three distinct stages of production: increasing returns,
diminishing returns, and negative returns.

Increasing Marginal Returns

Stages of
Decreasing Marginal Returns
Production
Negative Marginal Returns

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Lecture Notes

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Stage I

In this phase, the marginal product of each additional worker increases.

This happens because as more workers are added, they can cooperate
with each other to make better use of their equipment.

As we see in Figure (46), the first worker produces 10 units of output. The
second is even more productive, with a marginal product of 15 units, bringing
total production to 25. As long as each new worker contributes more to
total output than the worker before, total output rises at an increasing rate.
According to the figure, the first four workers are in Stage I.

When a firm learns that each new worker increases output more than the
last, it tries to hire yet another worker.

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Stage II

In Stage II, the total production keeps growing, but it does so by

smaller and smaller amounts. Each additional worker, then, is
making a diminishing, but still positive, contribution to total
output.

In Figure (46), Stage II begins when the fifth worker is hired,

because the 20- unit marginal product of that worker is less than
the 30- unit marginal product of the fourth worker. The stage ends
when the seventh worker is added, because marginal products are
no longer positive after that point.

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Stage III

If the firm hires too many workers, they will get in each other’s way,
causing output to fall. Stage III, then, is where the marginal products of
additional workers are negative.

For example, the ninth worker has a marginal product of minus 5, and the
tenth’s is minus 15, causing output to fall.

Because most companies would not hire workers if this would cause total
production to decrease, the number of workers a firm hires can only be
found in Stage II (will hire from 5 to 7 workers).

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Lecture Notes

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Long-run production and long-run costs differ from their short-run counterparts.

There are no fixed inputs in the long-run, the law of diminishing returns
does not apply to long-run production.

The costs of production can be at their lowest possible level in the

long-run, because everything –including plant size, location, number of
plants, and technology- can be varied.

Larger plants may be able to produce a good with fewer input units
per unit of output. In other words, production may be doubled with
less than twice the initial amount of resources. The result obviously is
a lower cost per unit of output.

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Lecture Notes

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