Inputs and Output

Production is the process of transforming inputs into outputs. For instance, a bicycle manufacturing firm produces different types of bicycles - mountain bikes, road bikes, hybrid bikes, and others. These bicycles are referred to as outputs. The firm uses resources such as steel, rubber, paint, gears, brakes, assembly machinery, factory space, labor, and so on. These are known as inputs.

For simplicity in economic analysis, we make two key assumptions:

1. The firm produces only one type of bicycle (single output)

2. The firm uses only two inputs: labor (L) and capital (K)

Production function

A production function is an economic concept that describes the relationship between inputs and outputs. It reflects all the potential combinations of inputs that are needed to produce any given level of output. It is represented as follows:

Q=f(L,K)

Here, Q gives the quantity of output, K is the quantity of capital employed, and L is the quantity of labor used.

The production function serves two main purposes:

1. It shows the maximum output achievable given specific quantities of combined inputs.

2. It can determine the specific quantities of combined inputs that are required to achieve a desired level of output.

For example, if the firm aims to produce 500 bicycles in a month, the production function can determine all the potential combinations of workers and machines.