What is a Production

Function?
Technical relationship that transforms inputs
into outputs.
Mathematician
y=f(x)
 Complexity
Crops grow seasonally and are affected by
numerous inputs
Some inputs we control, others are random
e.g., hurricanes!!)
Time is also important (e.g. differences in
production cycles)

Can we cope?
Complexity
All the variables you manipulate (i.e. rates of
fertilizer, feed, feed ingredient level, etc.) affect
your response (yield)
yield
When we compile multiple years of data from
these changes, we can predict the response in
a similar vein to what economist do.
Key difference: economists manipulate nothing.
They simply look at what conditions were in
effect when a previous production cycle
occurred.
Classification of Inputs
Manager has control over variable inputs
such as rate of fertilization, feed rate, etc.
What we dont control is called fixed input:,
input
unchanging during length of trial (harvesting
pump; feed silos, vehicles, land)
Random inputs:
inputs associated with nature or
economics beyond that of the farm
All this results in unique growing seasons.
Assumptions that make it
work
1) Factors are continuous for entire production cycle
(e.g., level of technology, land ownership, govt.
programs)
2) Production curve is smooth, well-behaved (e.g.,
fertilizer, labor )
3) The manager has perfect insight ( perfect
certainty)
certainty .
4) No time discounting of production, or discount in
price for early payment of a bill (removes time
element from consideration)
5) Manager is motivated by profits and optimization
Goals of Production
Economics
1) assist farm managers in determining the
best use of resources,
resources given changing
needs, values and goals of society
2) assist policy makers in determining the
consequences of alternative public policies
on output, profits, and use of resources on
the farm
3) evaluate the uses of the theory of the firm
for improving farm management and
understanding the behavior of the farm as a
profit-maximizing entity
Goals of Production
Economics (continued)
4) evaluate the effects of technical and
institutional changes on agricultural
production and resource use
5) determine individual farm and aggregated
regional farm adjustments to output supply
and resource use to changes in economic
variables in the economy
How it works?
The effect of a single input on output can be
determined if only that input is varied and
all others are held constant.
Involves:
1) concept of the production function
2) average and marginal physical product
3) various stages of production
Concept of a Production
Function
The production function represents an
input-output relationship
describes the rate at which resources are
transformed into products
relationships vary: animal variety, soil
types, water quality, technologies, El Nio
any given input-output relationship
specifies the quantities and qualities of
resources needed to produce a particular
product
The production function is a technical
relationship depicting the technical
transformation of inputs into outputs.
The production function in and of itself is
devoid of economic content.
In the development of production functions,
we are interested in certain characteristics
that make it possible to construct economic
models based on optimizing behavior.
One way to write the production function is as
a function map: f :Rn+ Rm+
which states that the production function ( f )
is a function that maps n inputs into m
outputs.
A commonly used form of the production function
is the closed form representation where the
total physical product is depicted as a function of
a vector of inputs.
y= f(x)
where y is the scalar (single) output and x is a
vector (multiple) inputs.

One Product, One-Variable

Factor Relationships
Using this relationship, we want to identify
three primary relationships:
1. Total physical productwhich is the original
production function.
2. Average physical productdefined as the
average output per unit of input.
Mathematically,
APP= y/x = f (x)/x
3. Marginal physical productdefined as the
rate of change in total physical product at a
specific input level. Mathematically,
MPP= d(TPP)/dx = dy/dx= d f (x)/dx= f
(x)
Elasticity of Production

Elasticities are often used in economics to

produce a unit-free indicator of the shape of
a function. Most are familiar with the
elasticity of consumer demand.
In defining the production function, we are
interested in the factor elasticity.
The Production
Function
The function can be expressed in many
ways: written form, tabular, graphical
written form: Y = f(X1, X2, X3,, Xn)
Y = output or yield, the Xs are different
inputs that take part in the production of Y
examples: yield is a function of fertilizer
Note: this written equation/form does not
specify the importance or contribution of
inputs to the production process
 The production function can also be shown
The Production
in either Function
tabular or graphical form.
Usually picks one variable input and
studies the effect on yield.
Yield is also referred to as total physical
product or TPP.
Keeps all other variable inputs fixed as
well as traditional fixed inputs
Empirical Example
Fertilizer Yield
0 lbs/ha0 lbs
20 37
40 139
60 288
80 469
100 667
120 864
140 1045
160 1195
180 1296
200 1333
220 1291
TPP curve

Tabular form Graphical form

 Empirical Example
Data in the previous table/figure represent a
production function relating shrimp yields to applied
fertilizer
units of fertilizer (e.g., nitrogen and phosphate)
represent the variable input, while all other inputs
needed to produce shrimp (seed, labor, fuel, land)
are the fixed inputs
Fuel, seed, etc. were variable inputs! Typically, yes,
but in this case they remain constant
As shown, large increases in yield result from initial
fertilizer applications
However, yield increases become smaller at higher
levels of application
A max of 1,330 lbs/ha was achieved with 200 lbs of
fertilizer, afterwards declining
More detail on the
Classical Production
Function
Other characteristics of
production function curves:
1) the production function is
a continuous curve
2) inputs and outputs are
perfectly divisible
(otherwise, it would look
like a series of dots)
3) inputs and outputs are
homogenous (prices of
product at one level of
input are similar to others)
Total physical product (TPP) Curve
Production Assumptions
(1) Perfect Certainty
To use the production function,
economists, farmers, etc. must agree
upon the outcome (yield) for each
unit of input
past results (e.g. shrimp yields in
response to fertilizer) must at least
approximate this years function
(perfect certainty)
thus, the production function is a
planning device
Production Assumption
2: level of technology
If you produce, it is assumed that you do it via
a certain methodology or process
unfortunately, a product can be produced in
many ways
we normally assume in production economics
that the manager uses the most up-to-date
technology
Translation: we assume the farmer uses the
process that yields the most output from a
given amount of input
Production Assumption
3: length
The of time
production function period
shows output at various
levels of input over a specific length of time
As a result, all inputs (except the one youre
evaluating ) are fixed
reasons for fixing a variable
1) maybe the amount used is just the right
amount, any more or less would lower profits
2) maybe the production time period is too short
to change the amount of resource on hand
(e.g., land)
3) the farmer just may not want to change the
amount of resource (e.g., not changing the
number of dairy cattle in order to evaluate a
feed effect)
Three Stages of
Production
The classical production function can be
divided into three stages:
First Stage: the average rate at which
variable input (X) is transformed into product
(Y) increases until it reaches its maximum
(i.e., Y/X is at its maximum)
this maximum indicates the end of Stage 1
Production Stage 1
Stage 1 the phase of increasing production
efficiency
production efficiency is not just the maximum
production level
This efficiency is known as average physical
product, APP and is determined by dividing
yield by its corresponding amount of input (Y/X)
Stage 1 ends where Y/X is largest, around 150
lbs input
Production Efficiency
Three Stages of
Production
Stage 2: physical
efficiency of the variable
input is at a peak at the
beginning of Stage 2
Stage 2 ends when yield
(APP) is at its maximum I II III
Bottom line: maximum
efficiciency does not
equal maximum
production
APP curve
TPP curve
Three Stages of
Production
Stage 3: starts once TPP starts to decline
result of excessive quantities of variable
input combined with fixed inputs
in order for all this to make sense, we need
to understand that production functions are
used to determine the most profitable
amount of variable input and output
the production function allows you to make
recommendations about input use even
when input/output prices are unknown
What this Describes:
Law of
Originally Diminishing
developed by early economists to
Returns
describe the relationship between output and a
variable input, when other inputs are constant
if increasing the amount of one input is added
to a production process while all others are
constant, additional output will eventually
decrease
implies there is a right level of variable input
to use with the combination of fixed inputs
A Neoclassical
Production
Figure 2.3 Text Book Function
Inflection point-this is where the function
changes from increasing at an increasing rate
to increasing at a decreasing rate.
Inflection point-marks the end of increasing
marginal returns and the start of diminishing
marginal returns.