1.

0 INTRODUCTION
1.1 Definition of Production Function
Production is a process conducted by firms to produce goods and services through combining
different resources or factors of production. Production can be defined as the organised
activity of transforming inputs or natural resources, such as labour, capital, land and raw
materials (Maurice et al, 2013) into outputs in the form of products or services. The objective
of production is to satisfy demand for transformed inputs (Bates and Parkinson, 1963)
through the process of manufacturing by increasing the utility of the resources, hence
satisfying a greater human want (Toppr, n.d.).
The production function can be defined as the maximum quantity of an output that
can be produced using different combinations of inputs given certain knowledge (Gordon,
2011). It can be expressed as a transformative relationship between the quantity of factor of
production used and the amount of output obtained. By combining the factors of production,
each unit of goods and services produced is obtained from every combination of inputs, with
the assumption that the most efficient means of production available are utilised (Britannica,
n.d.).
1.2 Brief History of the Production Function
Production theories have existed since before Adam Smith during the Roman times when
economics did not merely address production and distribution (Gordon, 2011). Some
believed that Philip Wicksteed (1894) was the first to formulate the relationship between
output and inputs (Mishra, 2007), while there is some evidence that suggest Johann von
Thunen (1840’s) first discovered this. He found that by changing two inputs, it would affect
the level of output upon reducing one input for the other’s increase. He formulated the
production function using calculus in efforts to solve agricultural economic optimization
problems and interpreted marginal productivity, which today is used in modern marginal
productivity theory (Gordon, 2011).
1.3 Factor of Production
Inputs or factors of production are traditionally distinguished into labour, land, capital and
enterprise. Labour is defined as the human effort, whether it be skilled, semi-skilled or
unskilled, involved in producing goods and services through physical exertion, mental
exercise, use of intellect and others. This factor is highly perishable as it cannot be stored nor
utilised the next day and the quality and efficiency of labour will depend on skills, work
culture and incentives. Whereas land is a tangible natural resource that the company uses to
make its products. It represents the overall natural resources, such as forests, rivers and the
ones used by businesses, hence it is also referred to as a natural factor of production
(StudySmarter, n.d.). Finally, entrepreneurship refers to the combination of factors to produce
goods and services. Entrepreneurs are people who decide the production process and the best
way to utilise factors of production.

1.4 Production Function

A traditional two-input production function is Q = F(L + C), where Q stands for the output
quantity, C for the capital utilised, and L for the unit of labour employed. This production
function describes how a firm can produce one unit of output for every unit of capital or
labour it employs. Additionally, this implies how the industry has constant returns to scale,
whereby the output will increase proportionately to any increase in inputs. This can be seen in
Figure 1.

Figure 1
The production function might be rigid or flexible depending on the production conditions. It
is rigid in the short run resulting in fixed proportions of inputs utilised to produce a certain
output. Moreover, it is conceivable to raise one input while maintaining the quantities of the
others in order to produce greater output. In the long run, a firm may be able to adjust all
inputs up or down in accordance with its scale.
It can be concluded that there are two types of production function: linear
homogeneous and non- homogeneous production function. Linear homogeneous occurs when
output would change proportionately as the change in inputs. If the input is doubled, so will
output. It implies that it is a constant return to scale. Meanwhile, non- homogeneous
production function is when there is an increasing return to scale and vice versa. This implies
that output increases increasingly as each unit of input is added.
Cobb-Douglas Production Function
Another common production function is the Cobb-Douglas production function which is
Q= A C a + L1−a where Q stands for output, L for labour, C for capital employed, A and a are
positive contestants. The exponents of L and C in this production function added together are
equal to 1 that reflects the scarcity and limitation of resources in one economy.

New Production Function - Technological Progress

As innovation and discovery of new and more efficient methods of production become
increasingly available, technological progress changes. Additionally, new discoveries might
boost the effectiveness of all production techniques. At the same time, some production
methods might stop working properly and become inefficient.

Figure 2 Figure 3
Based on the figures, the impact of process innovation is depicted by an increase in
the production function (Figure 2) or a decrease in the production isoquant (Figure 3). This
change demonstrates the possibility of producing the same amount of output with fewer
factor inputs or greater output with the same inputs. The isoquant’s shape may be changed as
a result of technological advancements. It depends on the rate of substitution of the inputs.
 References

Bates, J. Parkinson, J. R. Basil Blackwell, Oxford, 1963 Pp. xiii -f 328.

Britannica. (2023, May 2). production function Definition. Britannica. Retrieved May
24, 2023, from https://www.britannica.com/money/production-function
Gordon, D. M. (2011, February 11). A Brief History of the Production Function and
its Role in Economics. A Brief History of the Production Function and its Role in
Economics, 18(1), 65-69.
Toppr. (n.d.). Labour as a Factor of Production: Meaning and Features. Toppr.
Retrieved May 24, 2023, from
https://www.toppr.com/guides/business-economics/theory-of-production-and-cost/
factors-of-production-labour/
Maurice, Charles, Thomas, Christopher R. (2013). Managerial Economics:
Foundations of Business Analysis and Strategy Ed. 11 (Ed. 11). New York: McGraw
Hill.
Toppr. (n.d.). Meaning of Production: Processes in Production, Examples, Questions.
Toppr. Retrieved May 24, 2023, from https://www.toppr.com/guides/business-
economics/theory-of-production-and-cost/meaning-of-production/
Mishra, S. (2007, October 9). A Brief History of Production Functions Munich
Personal RePEc Archive. Munich Personal RePEc Archive. Retrieved May 24, 2023,
from https://mpra.ub.uni-muenchen.de/5254/
StudySmarter. (n.d.). Production: Definition, Factors, Example and Types.
StudySmarter. Retrieved May 24, 2023, from
https://www.studysmarter.co.uk/explanations/microeconomics/production-cost/
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