Ekonomi Mikro

Production Function

8-9
Dr.Ir.H. Sadik Ikhsan, DAD, MSc., IPM
Jur. Sosial Ekonomi Pertanian
Fak. Pertanian - ULM
 production function

Persoalan Ekonomi:
: (1) what to produce and in what quantity
(2) how to produce
(3) how to distribute it
Production Function
aktivitas produksi unit usaha: input  output
ekonom: aktivitas produksi berkaitan dengan choice
(tapi menghindari “keruwetan” engineering of production)
mengonstruksi model produksi
model produksi dinyatakan dalam fungsi produksi
f. produksi: keterhubungan fisik antara input dan output

q = f(k, l, m, ….) output q

input k kapital
l labor
m raw material
… others

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 production function

Production Function
The principal activity of any firm is to turn inputs into outputs. Because economists are
interested in the choices the firm makes in accomplishing this goal, but wish to avoid
discussing many of the engineering intricacies involved, they have chosen to construct an
abstract model of production. In this model the relationship between inputs and outputs is
formalized by a production function of the form q = f(k, l, m, ….)

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 production function

Production Function
CD (Cobb & Douglas (1934))
q = f(k,l) = Akalb
ln q = ln A + a ln k + b ln l, a, b: elastisitas produk
A, a, and b are all positive constants
- homogeinety,
- degree of RTS
- elastisitas
CES, constant elasticity of substitution
(Arrow, Chenery, Minhas, Solow (1961))
q = f(k,l) = [kρ + lρ]γ/ρ ρ  1, ρ ≠ 0, γ > 0
Leontief
Translog

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 marginal productivity
Marginal Physical Product (MPP)

■ marginal product  partial derivatives

: all other input usage is held constant while the input of interest is being varied
 a farmer hiring one more laborer to harvest the crop but holding all other inputs
constant
 worker = 1

50 workers 51 workers
MPP the 51st = 2 bushels
worker /year
produce wheat per year 100 bushels 102 bushels
with the same land
 output = 2
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 marginal productivity
Contoh:

■ MPPl
Why?

l = 40 → q = 32
l = 50 → q = 25

■ MPP2 = ….

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 marginal productivity

Sumber: Debertin (2012: 53)

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 marginal productivity
Diminishing Marginal Productivity
MPPinput depends on how much of that input is used

labor, for example, cannot be added indefinitely to a given field (while keeping the amount of
equipment, fertilizer, and so forth fixed) without eventually exhibiting some deterioration in its
productivity

assumption: diminishing marginal physical productivity

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 marginal productivity

Average Physical Productivity (APP)

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 marginal productivity
Contoh:

■ APPl

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 isoquant

■ production function, q = f(l, k)

■ isoquant → iso = equal, q = f(l, k)= q0

q = 10
q = 20
q = 30

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 isoquant
Isoqant Map
■ isoquant: combinations of k and l that are
able to produce a given quantity of output
all combinations of k and l fall on the curve
labeled “q = 10” are capable of producing
10 units of output per period
isoquant records the fact that there are
many alternative ways of producing 10 units
of output: A or B or others
lA, kA → output: q = 10
lB, kB → output: q = 10

■ there are infinitely many isoquants in the k–l plane

each isoquant represents a different level of output
isoquants record successively higher levels of output as we move in a northeasterly direction

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 MRTS

The marginl rate of technical substitution (MRTS)

■ the slope of an isoquant shows how one input can be traded for another while holding
output constant

■ output is to be held constant as l is substituted for k

■ value of trade-off rate will depend not only on the level of output
but also on the quantities of capital and labor being used
its value depends on the point on the isoquant map at which the slope is to be measured.

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 MRTS
MRTS and marginal productivities
■ production function q = f(l, k)

■ total differential

along an isoquant, dq = 0
(output is constant)

slope of isoquant

𝒌
- jika tinggi (mis.  A) maka besar
𝒍
maka akan banyak kapital yang harus dikorbankan untuk menambah 1 satuan labor
𝒌
- jika rendah (ms.  B) maka kecil → berarti lebh sedikit …………
𝒍

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 RTS
Return to Scale
■ question: how output responds to increases in all inputs together
suppose that all inputs were doubled
(1) a doubling of scale permits a greater division of labor and specialization of function.
→ efficiency might increase: production might more than double
(2) doubling of the inputs entails some loss in efficiency
because managerial overseeing may become more difficult
given the larger scale of the firm.

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 RTS
Return to Scale

(1) if a proportionate increase in inputs increases output by the same proportion, the
production function exhibits constant returns to scale ICRTS);
(2) If output increases less than proportionately, the function exhibits diminishing
returns to scale (DRTS);
(3) if output increases more than proportionately, there are increasing returns to
scale (IRTS)
Note: theoretically possible for a function to exhibit constant returns to scale for some levels of
input usage and increasing or decreasing returns for other levels.

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 homogeneity
Homogeneity
■ a production function q = f(k, l) is said to be homogeneous of degree k if
f(tk, tl) = tk f(k, l)

■ degree of return to scale

k=1 CRTS  f(tk, tl) = t1 f(k, l) = t f(k, l) = tq
k>1 IRTS
k<1 DRTS

■ k=0 doubling of all of its arguments leaves the value of the function
unchanged
f(tk, tl) = t0 f(k, l) = 1. f(k, l) = f(k, l)

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 CRTS
Constant Return to Scale
■ a firm’s production function might exhibit CRTS
: the firm operates many identical plants
→ increase or decrease production by varying the number of plant in current operation
doubling output by doubling the number of plants operates
and employ precisely twice as many inputs
≡ an entire industry composed of many firms

■ studies of the entire U.S. economy have found that CRTS is a reasonably good
approximation to use for an “aggregate” production function

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 homogeneity, RTS
Homogeneity
■ a production function q = f(k, l) is said to be homogeneous of degree k if
f(tk, tl) = tk f(k, l)

■ k=1 CRTS f(tk, tl) = t1 f(k, l) = t f(k, l) = tq

k>1 IRTS
k<1 DRTS

■ k=0 doubling of all of its arguments leaves the value of the function
unchanged

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 Elastisitas Substitusi

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 elasticity of substitution
Elasticity of Substitution
: how “easy” it is to substitute one input for another

■ elasticity of subs.: parameter to measures this degree of responsiveness

k
■ RTS will decrease as the capital-labor ratio, k/l decreases
■ If the RTS does not change at all for changes in k/l,
then we might say that substitution is easy
because the ratio of the marginal productivities of
the two inputs does not change as the input mix changes
■ alternatively, if the RTS changes rapidly for small changes in k/l,
we would say that substitution is difficult
because minor variations in the input mix will have a substantial
q = f(k, l)
effect on the inputs’ relative productivities.

O l

RTS will decrease as the capital-

labor ratio, k/l decreases

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 elasticity of substitution
Elasticity of Substitution
: how “easy” it is to substitute one input for another

the value of σ is always positive

because along an isoquant, k=l and RTS move in the same direction

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 elasticity of substitution
Elasticity of Substitution

■ A → B: moving on an isoquant
causing: both the RTS and the ratio k/l
change

■ the relative magnitude of these changes:

- if σ: high
RTS will not change much relative to k/l
isoquant: be relatively flat
- if σ: low
RTS will change by a substantial amount
as k/l changes
isoquant a rather sharply curved

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 elasticity of substitution
Elasticity of Substitution
Linear: σ = ∞

■ linear production func. q = f(k, l) = ak + bl

■ CRTS f(tk, tl) = atk + btl = t(ak + bl) = t f(k, l)

𝐛 𝐪
■ isoquant k=– l+ with
𝐚 𝐚
all isoquants for this production function are parallel straight
b
lines with slope –
a

■ because the RTS is constant along any straight-line isoquant

RTS = 0 then σ = ∞

■ σ=∞ capital and labor are perfect substitutes

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 elasticity of substitution
Elasticity of Substitution
Fixed proportion: σ = 0
■ fixed proportion production func. q = min(ak, bl) a,b > 0
■ isoquant: L-shaped
■ “min” means that q is given by the smaller of the two values
in parentheses
ak < bl q = ak
capital is the binding constraint in this production process
employment of more labor would not raise output,
and hence the marginal product of labor is zero
ak > bl q = bk
ak = bl both inputs are fully utilized
𝑘 b
=
𝑙 a
production takes place at a vertex on the isoquant map
capital and labor must always be used in a fixed ratio
if both inputs are costly, this is the only cost-minimizing place
to operate

■ no substitution is possible: capital-labor ratio is fixed at b/a

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 elasticity of substitution
Elasticity of Substitution
CD: σ = 1

■ CD production func. q = f(k,l) = Akalb

■ isoquant: “normal” convex shaped
■ degree of return to scale:
all inputs were increased by a factor of t, then
f(tk,tl) = A(tk)a(tl)b = t(a+b) Akalb
a+b = 1 CRTS
a+b > 1 IRTS
a+b < 1 DRTS

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