Production Function Examples

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Factory

Simple linear production function

The simplest production function is a linear production function with only one input:

Q = a * L

For example, if a worker can make 10 chairs per day, the production function will be:

Q = 10L

linear production function

Diminishing returns

In the linear example, we could keep adding workers to our chair factory and the production function wouldn’t change. If there are 50 workers, the production will be 500 chairs per day. Let’s now take into account the fact that we have fixed capital and diminishing returns.

Q = a * Lb 0<b>1

For example:

Q = 10 * L0.5

Now, the relationship between output and workers can be seeing in the following chart:

diminishing returns production function

Multiple Factors

Let’s now take into account the fact that there can be more than one input or factor. Let’s say we can have more workers (L) but we can also increase the number of saws (K).

Q = a * Lb * Kc 0<b<1 0<c<1

For example:

Q = 10 * L0.5 * K0.6

Now, the relationship between output and workers can be seeing in the following plot:

cobb douglas production function

This kind of production function Q = a * Lb * Kc 0<b<1 0<c<1 is called Cobb-Douglas Production Function.

Fixed proportions

Let’s assume the only way to produce a chair may be to use one worker and one saw. An additional saw may be useless if we don’t have an additional worker.

This kind of production function is called Fixed Proportion Production Function, and it can be represented using the following formula:

min{L,K}

If we need 2 workers per saw to produce one chair, the formula is:

min{2L,K}

The fixed proportions production function can be represented using the following plot:

fixed proportions production function

Perfect substitutes

In this example, one factor can be substituted for another and this substitution will have no effect on output.

Let’s say one carpenter can be substituted by one robot, and the output per day will be the same.

The formula for this example is:

Q = a * L + d * R

If we go back to our linear production function example:

Q = 10 * L + 10 * R

Where R stands for the number of robots.

If one robot can make 100 chairs per day, and one carpenter 10:

Q = 10 * L + 100 * R

perfect subsitutes production function

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