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LECTURE 7

PRODUCTION THEORY
UNIVERSITI PUTRA MALAYSIA

Prepared by
Datuk Dr Muzahet Masruri
2014

Slide 1

The Production Function
• Production refers to the transformation of inputs into outputs (or product)
• An input is a resource that a firm uses in production process for the
purpose of creating a good or service
• A production function indicates the highest output (Q) that a firm can
produce for every specific combinations of inputs (physical relationship
between inputs and output), while holding technology constant at some
predetermined state.
• Assuming that the firm produces only one type of output with two input,
labour (L) and capital (K)
• Cobb-Douglas production function:

Q = αLβ1 Kβ2

or Q = f(L,K)

where, α, β1 and β2 are constants
Slide 2

The Cobb-Douglas Production Function
• The quantity of output is a function of, or depend on, the
quantity of labour and capital used in production
• Output (Q) refers to the number of units of the commodity
produced
• Labour (L) refers to the number of workers employed
• Capital (K) refers to the amount of the equipment used in
production
• Technology is assumed to remain constant during the period of
the analysis

Slide 3

Production Function
in the Short Run

Slide 4

The Short Run
• The short run is a time period in which the quantity of some
inputs, called fixed factors, cannot be increased. So, it does
not correspond to a specific number of months or years.
• A fixed factor is usually an element of capital (such as plant
and equipment). Therefore, in our production function capital
is taken to be fixed factor and labour the variable one;

Q = f (L, 𝐾)
• To increase output the firm must employ more variable inputs,
e.g. in auto assembly plant, the firm can increase output only
by employing more labour, such as scheduling additional
shifts
Slide 5

Total, Average and Marginal Product
• Total product (TP) is the total...