University of Anbar

College of Agriculture

Department of Agricultural Economics

Mathematical Economics

Fourth Stage

Department of Agricultural Economics

The seventh lecture

Production functions

Prof. Dr. Ali Darub Kassar

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 Production Functions

Production Function
The production function represents the set of technically efficient and feasible
relationships between production factors and production quantity. If the quantity of
production that represents the dependent variable with the symbol is
expressed, and the production elements, which are the independent variables, are
given the symbols , then the production function takes the
following form:

Y  f ( X 1 , X 2 ,....., X n )
The production function can also be known as ((a relationship between the
production elements (Inputs) and the final output (Outputs)). It expresses the
technical condition that links inputs and outputs, and this relationship is based on
the use of production elements in their various forms, the most important of which
are labor and capital .
The production function can be formulated in its simplest form from the fact that
the volume of production Y is linked to a significant relationship with the factors of
production, capital, labor and technical progress. In this case, the production
function takes the following general form:

Y  f ( K , L)
It represents the quantity of production per unit time, or it represents the
quantity of capital and represents the volume of work used in the production
process. As for technical progress, it can be entered into the functional
relationship in several ways that there is no room for exposure here, and
econometricians have made great efforts to try to clarify the mathematical forms

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of production functions. Based on the statistics available at the level of the
enterprise, the industrial sector, or the national economy, the task of the
mathematical economy is limited to analyzing production functions from a
theoretical and mathematical point of view and finding their indicators based on
the concepts of derivation and differentiation.
There are many forms of production functions and they take different forms, but
the most common are the following:

First: Linear Function

This form of functions assumes a complete substitution between the factors of
production, since the commodity here can be produced either by using capital only
or the labor factor only, or by infinite combinations of labor and capital, and it
takes the following form:

Linear Function

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Second: Input-Output Function( Leontief function)
The function depends in its formulation on that the substitution coefficient
between the factors of production equals zero, which means that there is only
one way to produce any commodity, either it is the use of the capital element
without any use of the labor factor or the use of the labor factor without any use
of the capital element This means that the elasticity of substitution between the
components of capital and labor is equal to zero, ie:-

The Leontief function takes the following form:

Input-Output Function( Leontief function)

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Third: Kinked isoquant function
The Kinked Isoquant is represented in the following Figure in which the
substitution is limited between the elements of production (K,L), and there are
only a few ways to produce any commodity, and the substitution is possible at the
breaking point. This figure is also called the activity analysis curve or
programming curve Linear, as the general regulators and production engineers
tend to use the refracted curve because they view the production process as
having a separate direction discrete, not continuous. , as in the following figure:

Kinked isoquant function

Fourth: The isoconvex function is equal to the origin

It is the finite substitution between the two components of production, labor and
capital ( ), and it is the smooth-convex isoquant. The convexity is towards the
origin point because it represents a decreasing marginal substitution, because the

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marginal substitution rate will be equal to the ratio between the marginal
productivity of one factor of production to the marginal productivity of the other
element at any point on the equal product curve, which makes its slope negative.
The difficulty of substituting it for the other element, making the marginal products
of the factors of production positive and decreasing, which in turn represents the
rational area of production, and is expressed as follows:

convex isoquant
It is expressed mathematically as follows:-
If it is the production function , then the can be derived
mathematically, which represents the slope of the equal output curve, by taking
the total differential of the production function as follows:

dY  f1dK  f 2 dL

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It represents and the first partial derivative of each of the two factors of
production and , respectively, with respect to which is equal to the
marginal productivity of each of them. For the purpose of maintaining the same
level of production, this must be done . At that, it can be increased by
an amount and decreased by an amount , that is-:

f1dK  f 2 dL  0
f1dK   f 2 dL

dL f1 MPK
    MRTS
dK f 2 MPL LforK

Where f 1= MPK
f 2= MPL

This leads to the term “Marginal Rate of Technical Substitution”, which is

symbolized by ( ), which means decreasing the quantities used of a
particular production element in exchange for an increase in the units used of
another production element while the level of production remains unchanged, and
the slope of the curve Whether the product expresses that convention.

Fifth: Edgworth Box

This function is used to produce two commodities, not one, and by using a
different mixture of the two production elements, labor and capital. Here two
functions are formed by the number of commodities produced, and each
commodity has a production function.

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 Edgworth Box function

Cobb-Douglas Function
This function is widely used in theoretical and applied research, and for this
reason we will focus on this form of production functions in the coming pages.
It should be noted that there are three basic laws governing the production
process, which are:

First: - There is a direct relationship between the volume of production ( ) and

the use of production factors ( ).

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Second: The Law of Diminishing Return: The marginal productivity of production
factors decreases when they are increased.
Third:- Yield of scale, as the yield of volume shows the percentage increase
in the volume of total production resulting from an increase in the level of activity
(that is, all the factors of production used) by a certain percentage. If we start
with the function:

Y   0 L1 K  2
Paul Douglas, C.W Cobb, using data on realistic relations of production over
twenty-four years, discovered a function whose greatest advantage is its flexibility
to apply the three laws previously mentioned.

Y   0 L1 K  2 .....................(1)

= output,
= number of employees (man/year),
= capital,
= fixed amount.
= Positive factors whose value varies from one function to another.

This function in which Paul Douglas, C.W Cobb tried to adapt data on the
American industry in the period from 1899-1922 AD to measure the extent of the
contribution of labor and capital to production is one of the most important tools of
economic analysis that have appeared so far and which have spread widely and
are still widely used in the field of studies In addition, this function is the tool that
enabled economists to build models and discover other functions that led to a
clear breakthrough in the methods of economic analysis in our time. Therefore,

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studying this function in detail in all its aspects is a primary goal in this part of the
article.

How do the three laws apply to this function:

First: production elasticity in view of its factor
It means the degree of response to a change in the volume of production as a
result of a change in the volume of one of the factors of production used. By
differentiating function (1) with respect to the work element , it becomes clear
that:

Y
L

 1  0 L1 1 K  2 
 L1 K  2
 1 0
L
Y
 1
L
Since:
Y   0 L1 K  2
Y L
  1 .........................(2)
L Y
The elasticity of production for the factor of labor is called L (labour) since the
result in equation (2) indicates that:

Parameter of the labor component = the relative change in the volume of output
( ) / the relative change in the labor component ( )
In the same way as before, it can be shown that the elasticity of production with
respect to the capital component is equal to :

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 Y K
 2
L Y

If the employed percentage of the labor component ( ) increases by 1%, this will
lead to an increase in production by %, assuming that the component of
capital ( ) is constant, and if the percentage used of the component of capital
( ) increases by 1%, this will lead to an increase in production by %,
assuming that it is constant. working element ( ).

Second: diminishing returns

The law of diminishing returns means diminishing marginal productivity. That is,
the marginal productivity of the factor of labor is:

Y Y
 1
L L

That is, the marginal productivity of the factor of production decreases

with the increase in the user from . By analogy, the marginal productivity of the
factor is:
Y Y
 2
K K

That is, the marginal productivity of the factor of production, also

decreases as the employee increases from .

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Third: The returns to scale
The returns to scale shows the percentage increase in the volume of total
production resulting from an increase in the level of activity (that is, all the factors
of production used) by a certain percentage. If we start with the function:

Y   0 L1 K  2
If we decide to increase the activity level for , then:
Y   0 ( AL) 1 ( AK )  2
  0 A 1 L1 ( A  2 K 1 )
...............................(3)
 A 1   2 (  0 L1 K  2 )
 A 1   2 Y

That is, if the volume of activity increases by a percentage , then the volume of
total production will increase by a percentage . Equation (3) can help us
estimate returns to scale and on that if:

)1( 1   2 =1 Constant Returns to Scale.

)2( 1   2 > 1 Increasing Returns to Scale .
)3( 1   2 <1 Decreasing Returns to Scale

Example : Show the characteristic of returns to scale in the following

production functions:

Y  2L0.7 K 0.6
Solution:

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 In order to calculate the returns to scale in the previous production functions,
the production factors are multiplied by a constant value, for example, m or
, or any other symbol, and as follows:-
Y  2 L0.7 K 0.6
 2(mL) 0.7 (mK ) 0.6
 2(m) 0.7 ( L) 0.7 (m) 0.6 ( K ) 0.6
 (m) 0.7 0.6 2( L0.7 K 0.6 )
 m1.3 Y
The returns to scale in this function are increasing. Thus, the same method can
be used for various forms of a function

In addition to the aforementioned properties, the Cobb-Douglas function is also

characterized by the following:
1- The function is linear in logarithmic form, that is:

LogY  Log 0  1 LogL   2 LogK.....................(4)

Formula (4) is of particular importance, since the function is estimated to have its
parameters, and they are in this simplified form.

2- The marginal production of the resource is a function of the average

production. If, for example, the marginal production of the resource is:
Y Y
MPL   1  0
L L
 1 ( APL )  0...................(5)

Since refers to the average product, which is equal to the total output
divided by the production resource L, equation (5) shows that the elasticity of
production for the resource is equal to the marginal production ratio of the
average production of the resource itself, that is:

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 MPL
1 
APL
The marginal production remains positive as long as the production resource as
well, and the set of points at which the marginal productivity of the resources is
equal to zero on the map of whether production forms the critical lines Ridge lines
of the function, within which the combination of resources is confined to the most
technically efficient, which is also called the rational area of production.

3- The Douglas Cobb function allows the emergence of one of the three
stages of production in which marginal productivity is either constant,
increasing, or decreasing.

 2Y Y
 1 ( 1  1) 2
L 2
L
It is clear from the second differential that its value, whether it is zero, positive or
negative, depends on the value of

4- The Cobb-Douglas function is a homogeneous function of degree

, that is, the degree of homogeneity depends on the sum of production
elasticities , where:

E  1   2

5- The positive values of the elasticity of production of suppliers, which are

less than the unit in this function, means that the curve of whether
production is convex towards the origin point, which means that the
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 Marginal Rate of Technical Substitution ( ) between suppliers is
decreasing as in the following figure:

Marginal rate of technical substitution

Y / L
MRTS LK 
Y / K
 Y / L 1 K
 1  ................(6)
 2Y / K  2 L

It is clear from the equation that as more is substituted for the is

constantly decreasing.

6- The function has no maximum point and therefore no critical lines

7- The technical method (resource blending method) depends on the ratio
in equation (6). With the stability of the capital component factor, the

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 increase in the labor factor means the use of the labor intensive
technique in production at the expense of machines, in other words, the
use of a greater amount of labor and vice versa if the value is greater
than the value , then the use of the capital intensive technique is the
best for production . It should be noted that the choice of either method
depends on the prices of these two suppliers.

8- The elasticity of substitution is defined as the relative change in resources

to the relative change in the marginal rate of substitution, meaning that:

%K / %L

%MRTS
Since is the elasticity of substitution, and to prove that the elasticity of
substitution of the C-D function is constant and equal to unity, then:

 ( K / L) /( K / L)  ( K / L) /( K / L)
  .......................(7)
 (K / L) /(K / L)  ( 1 /  2 .K / L)
( 1 /  2 .K / L)
 ( K / L)(1 /  2 )
 1
(  1 /  1 ) ( K / L )

Which means that the expansion path of the Cobb-Douglas function is a straight
line as shown by the following equation:

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 r 
K  ( 1 /  2 ) 1  L
 r2 

Various examples of production maximization:

Production equilibrium
The consumer is exposed to the problem of choosing goods that give him the
maximum possible satisfaction within the limits of his income, and the same thing
that the producer faces in choosing the factors of production from work and
capital, which gives him the maximum production at the minimum possible cost,
and we will be exposed to some concepts that help us in dealing with this topic
i.e. production equilibrium.

Isoquant curve :
It is the geometric locus of all combinations of the labor and capital components
(as assumed in this study), which give the product the same production volume,
which is represented by the following function:

Y0  f ( K , L)
Marginal rate of substitution: It is equal to the ratio between the change in the
amount of labor over the change in the amount of capital. To calculate this, we
calculate the total differential of the production function as follows:

dY0  f K dK  f L dL  0
L
 K =
f
MRS  
K fL

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Isocost line: Here we assume that the producer allocates a certain amount of
money, which we call the budget for the purchase of factors of production. The
cost function is written as follows:

TC  PK K  PL L

The ratio between the factors of production is expressed by the slope of the
straight line, that is, the slope of the isocost , and it is equal to:

PL

PK

The optimal behavior of the product: The producer aims to obtain the maximum
possible production at the lowest possible cost. This result can be reached in the
following ways: -
1- Graphical method: We draw the isoquant curve and the cost line curve.
When the line of equal costs touches the equal output curve at the point
marked in the figure below, which is point A, the coordinates of this point
represent the necessary quantities of the labor and capital components that
maximize the project's production at the minimum cost.

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 Production Maximization
2- Algebraic method: at the tangency point, the slope of the cost line =
marginal rate of substitution
3- Price per unit of capital / price per unit of labor = marginal productivity of
capital / marginal productivity of labor

PK f
 K
PL fL

4- 4- Lagrange multiplier method: the production function is maximized under

the constraint of cost and the following formula is formed

F  f ( K , L)   (TC  PK K  PL L)
By taking the first partial derivatives, we get the following:

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 F
 f K dK  PK  0  f K  PK ..............(1)
K
F
 f L dL  PL  0  f L  PL ..................(2)
L
F
 TC  PK K  PL L  0..............................(3)


From equation (1) and equation (2) we get the following:-

f K PK

fL PL
It is the same result that we obtained previously.

As for the optimal behavior of the product, which aims to reduce production costs
at a certain production volume, it can be obtained by forming the Lagrange
formula and as follows:-
F  PK K  PL L   (Y0  f ( K , L)

By taking the first partial derivatives, we get the following:

F
 PK  f K  0  PK  f K ...................(1)
K
F
 PL  f L  0  PL  f L ......................(2)
L
F
 Y0  f (k , L)............................................(3)

From equation (1) and equation (2) we get the following:-

PK f
 K
PL fL

Example (6.2): We have the following production function : the prices

of the factors of production and .

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Required: What is the maximum possible production within total cost = 100.
The solution: the mathematical way
The total cost function can be expressed as:

TC  100  5K  10L

To maximize production under total cost constraint, we form Lagrange's formula:

F  4 KL   (100  5 K  10 L)

The condition of maximizing the function, we extract the first partial derivatives

F
 4 L  5  0  4 L  5..............(1)
K
F
 4 K  10  0  4 K  10...........(2)
L
F
 100  5K  10 L  0......................(3)


From equation (1) and equation (2) we get the following-:

4
 L
5
4
 K
10
4L 4K

5 10
20 K  40 L
2K  4L
K  2L

By substituting a value in equation (3), we get the following:

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 K  10 , L5 , Y  200

Example : Information is available about a production function that takes

the following form: -

Y  2 K 2  4 KL  5L2
PK  80 ‫ و‬PL  40
Required:
1- Calculate the value of the total cost corresponding to the volume of
production, which is equal to
2- Calculate the volume of production corresponding to a total cost of

Solution
We want to reduce production costs at a certain production volume. We form the
following formula:-

F  (80K  40L)   (2000  2K 2  4KL  5L2 )

F
 80  4K  4L  0  80  4 ( K  L)............(1)
K
F
 40  4K  10L  0  40  2 (5L  2 K )........(2)
L
F
 2000  2 K 2  4 KL  5L2  0.............................(3)


From Equation 1 and Equation 2, we get the following:-

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 K  2L
L  20 , K  40
So the total cost corresponding to the volume of production is

To calculate the volume of production corresponding to a known total cost, we

form the following formula:-

F  2K 2  4KL  5L2   (6000  80K  40L)

F
 4 K  10 L  40  0  40  10 L  4 K ........(1)
L
F
 4 K  4 L  80  0  80  4 K  4 L..............(2)
K
F
 6000  80 K  40 L  0......................................(3)

After solving we get
So the volume of production corresponding to the total cost is

REFERENCES

1- Arne Henningsen &Geraldine Henningsen, Econometric Estimation of the

"Constant Elasticity of Substitution" Function in R: Package
micEconCES.2011.

2- - Elmer G. Wiens, Egwald Economics: Microeconomics: Production

Functions,2012, Published on line www. [Link].

3 - Judith K. Hellerstein and David Neumark, Production Function and Wage

Equation Estimation with Heterogeneous Labor: Evidence from a New

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 Matched. Employer-Employee Data Set. 2007. Published on line
[Link]

4- KC Border, On the Cobb–Douglas Production Function,California Institute

of Technology , Division of the Humanities and Social Sciences. Published
on line: [Link] .com.

5- Krister Ahlersten, Essentials of Microeconomics: Exercises. 2008.

Published on line [Link].

6- Rainer Klump, Peter McAdam and Alpo Willman, The Normalized CES
Production Function Theory and Empirics . European Central Bank. Working
Paper Series.2011.

7- Ronald C. Griffin, John M. Montgomery, and M. Edward Rister, Selecting

Functional Form in Production Function Analysis. Published on line: [Link]
.com.

8- Ted Bergstrom, Lecture Notes on Elasticity of Substitution. 2011. Published

on line: [Link] .com.

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