The Production Function

Intro to Production Functions

• Q = f(inputs)

  • this mathematical representation highlights the relationship between the quantity of inputs a firm uses and the quantity of output it produces

  • inputs would include your four factors of production

Total Product, Marginal Product, and Average Product

• Total Product: the total quantity of output produced by a firm using a given quantity of inputs

• Marginal Product: the additional output that is produced as a result of using one more unit of a specific input, holding other inputs constant

• Average Product: the output produced per unit of input, calculated by TP/Q input

• Marginal product of labor (MPL) : ∆Q/∆L

• Diminishing Marginal Returns: as you keep adding more workers (or other inputs) to a fixed resource, each extra worker will eventually produce less and less extra output

• TP is at maximum when MP becomes negative