For production, the function is
Y = ALαKβ,
where:
Y = total production (the monetary value of all goods produced in a year)
L = labor input
K = capital input
A = total factor productivity
α and β are the output elasticities of labor and capital, respectively. These values are constants determined by available technology.
In micro-economics, a production function is a function that specifies the output of a firm for all combinations of inputs. Ameta-production function (sometimes metaproduction function)
compares the practice of the existing entities converting inputs into output to determine the most efficient practice production function of the existing entities, whether the most efficient feasible
practice production or the most efficient actual practice production. [3]clarification needed In either case, the maximum output of a technologically-determined production process is a mathematical
function of one or more inputs. Put another way, given the set of all technically feasible combinations of output and inputs, only the combinations encompassing a maximum output for a specified
set of inputs would constitute the production function. Alternatively, a production function can be defined as the specification of the minimum input requirements needed to produce designated
quantities of output, given available technology. It is usually presumed that unique production functions can be constructed for every production technology.
By assuming that the maximum output technologically possible from a given set of inputs is achieved, economists using a production function in analysis are abstracting from the engineering and
managerial problems inherently associated with a particular production process. The engineering and managerial problems of technical efficiency are assumed to be solved, so that analysis can
focus on the problems of allocative efficiency. The firm is assumed to be making allocative choices concerning how much of each input factor to use and how much output to produce, given the
cost (purchase price) of each factor, the selling price of the output, and the technological determinants represented by the production function. A decision frame in which one or more inputs are
held constant may be used; for example, capital may be assumed to be fixed (constant) in the short run, and labour and possibly other inputs such as raw materials variable, while in the long run,
the quantities of both capital and the other factors that may be chosen by the firm are variable. In the long run, the firm may even have a choice of technologies, represented by various possible
production functions.
The relationship of output to inputs is non-monetary; that is, a production function relates physical inputs to physical outputs, and prices and costs are reflected in the function. But the production
function is not a full model of the production process: it deliberately abstracts from inherent aspects of physical production processes that some would argue are essential, including error, entropy
or waste. Moreover, production functions do not ordinarily model the business processes, either, ignoring the role of management. (For a primer on the fundamental elements of microeconomic
production theory, see production theory basics).
The primary purpose of the production function is to address allocative efficiency in the use of factor inputs in production and the resulting distribution of income to those factors. Under certain
assumptions, the production function can be used to derive a marginal product for each factor, which implies an ideal division of the income generated from output into an income due to each
input factor of production.
