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What is a Production Function?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 23 September 2016
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    Conjecture Corporation
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A production function has to do with the relationship between the output of a business and the amount of inputs that are involved in the ongoing operation of that business. Typically, two of the main factors relevant to the use of capital and labor in the pursuit of the most efficient level of production. Other production factors may also be present, depending on the nature of the company involved, including land, raw materials, and technology.

The concept of production function is focused on evaluating how the resources that go into the company are impacting the output of that business within a defined period of time. To this end, the focus is less on the economic behavior of the company and more on what is being done with the resources on hand. Evaluating each aspect of the production cycle can have the effect of reducing waste, which in turn reduces operational costs and makes it possible to earn more profit from each unit sold, providing an economic benefit. While important to the life of the business, this economic outcome is considered a side benefit to production function.

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Within the scope of production function, the idea is to understand how each input is contributing to the overall production effort of the company. Doing so makes it possible to identify resources that are currently providing marginal benefits, but could be utilized more efficiently and yield a greater benefit in terms of increasing the output of the company. At times, this may mean replacement of older technology with newer equipment, or possibly redesigning the production process itself to take better advantage of those inputs or resources. Even something as simple as combining tasks or eliminating steps that provide no real benefit may come about because of the careful consideration of each production function.

Businesses of all types and sizes can benefit from consideration of production function. While the basic process is certainly applicable to a manufacturing setting, the general idea works equally well with companies that provide various types of services. Since the idea is to determine if the input of resources is resulting in a reasonable level of output, the concept can be used with small retail businesses to effectively plan work schedules for hourly employees, as well as determine the layout of a production floor for a large corporation. All that is necessary is to identify the inputs involved, compare those inputs with the current outputs, and identify any possible ways to reach a more equitable balance between the two.

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