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This article explores the concept of production functions, which illustrate the functional relationship between a firm's physical input and output rates over time, using technology as a framework. It covers the transformation of inputs into outputs, highlighting the flow nature of production functions and their economic implications. Additionally, it analyzes factors of production as either fixed or variable, alongside key value metrics like Total Product (TVP), Marginal Value Product (MVP), and Marginal Revenue Product (MRP), providing insights into functional relationships in production.
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Production Function A production function shows the functional relationship given by technology between a firm’s physical rates of input and its physical rates of output per unit of time. TPP = f ( a, b, c, … )
Characteristics of a Production Function • Production refers to the transformation of inputs into output; • A production function is a flow concept; • A production function is a physical, technological, or engineering concept, and yet it has an economic dimension to it; and • In production analysis, factors of production can be separated into fixed and variable factors.
Value Relationships • Total Product (TVP) TVP = TPP * P • Marginal Value Product (MVP) MVP = MPP * P • Marginal Revenue Product (MRP) MRP = MPP * MR • Marginal Factor Cost (MFC)
