Production function

In economics, a production function relates physical output of a production process to physical inputs or factors of production. The production function is one of the key concepts of mainstream neoclassical theories, used to define marginal product and to distinguish allocative efficiency, the defining focus of economics.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, while abstracting away from the technological problems of achieving technical efficiency, as an engineer or professional manager might understand it. Production function denotes an efficient combination of inputs and outputs.

In macroeconomics, aggregate production functions are estimated to create a framework in which to distinguish how much of economic growth to attribute to changes in factor allocation (e.g. the accumulation of capital) and how much to attribute to advancing technology. Some non-mainstream economists, however, reject the very concept of an aggregate production function.

In general, economic output is not a (mathematical) function of input, because any given set of inputs can be used to produce a range of outputs. To satisfy the mathematical definition of a function, a production function is customarily assumed to specify the maximum output obtainable from a given set of inputs. The production function, therefore, describes a boundary or frontier representing the limit of output obtainable from each feasible combination of input. (Alternatively, a production function can be defined as the specification of the minimum input requirements needed to produce designated quantities of output.) Assuming that maximum output is obtained from given inputs allows economists to abstract away from technological and managerial problems associated with realizing such a technical maximum, and to focus exclusively on the problem of allocative efficiency, associated with the economic choice of how much of a factor input to use, or the degree to which one factor may be substituted for another. In the production function itself, 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 not reflected in the function.

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