Production Production FunctionFunction

A production function shows the functional relationship A production function shows the functional relationship given by technology between a firm’s physical rates of given by technology between a firm’s physical rates of input and its physical rates of output per unit of time.input and its physical rates of output per unit of time.

TPP = TPP = ff ( a, b, c, … ) ( a, b, c, … )

Characteristics of a Characteristics of a Production FunctionProduction Function

Production refers to the transformation of inputs into Production refers to the transformation of inputs into output;output;

A production function is a flow concept;A production function is a flow concept;

A production function is a physical, technological, or A production function is a physical, technological, or engineering concept, and yet it has an economic engineering concept, and yet it has an economic dimension to it; anddimension to it; and

In production analysis, factors of production can be In production analysis, factors of production can be separated into fixed and variable factors.separated into fixed and variable factors.

Value RelationshipsValue Relationships

Total Product (TVP)Total Product (TVP)

TVP = TPP * PTVP = TPP * P

Marginal Value Product (MVP)Marginal Value Product (MVP)

MVP = MPP * PMVP = MPP * P

Marginal Revenue Product (MRP)Marginal Revenue Product (MRP)

MRP = MPP * MRMRP = MPP * MR

Marginal Factor Cost (MFC)Marginal Factor Cost (MFC)

Functional Relationships Functional Relationships in Value Termsin Value Terms

Input TPP MPP Price TVP MVP MFC3 50 20 $5 $250 $100 $254 65 15 5 325 75 255 75 10 5 375 50 256 80 5 5 400 25 257 83 3 5 415 15 258 84 1 5 420 5 25