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Econ: What are Production Functions? 2 Views


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What are Production Functions? In economics, production functions are calculations of maximum output from a variety of given inputs. These production function calculations are used to compare production efficiency and which variables between like inputs can deliver the greatest net contribution, when managerial or technical factors are not part of the equation.

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Transcript

00:00

And finance Allah Shmoop what Our production functions well Grandma's

00:08

air The source of all A lot of useful wisdom

00:10

They say stuff like happiness isn't found It's created and

00:15

good manners don't cost nothing And there hasn't been any

00:19

good music since the the Elvis died Okay well maybe

00:22

not Everything they say is golden But here's another good

00:24

one You get out of something what you put into

00:27

it Yeah well that one actually works for economics to

00:30

it's the basic sentiment behind the production functions The production

00:34

function is a process that economists used to show how

00:36

much stuff you can make for every potential combination of

00:40

input It's essentially a mathematical equation based on data gathered

00:44

through the production process And it allows companies to graph

00:48

what production would look like given different inputs You know

00:52

they consider different questions Like what if we use more

00:55

workers Or what if we bought Mohr equipment You know

00:59

some big fancy factory with robots What if we replaced

01:02

the dehydrated milk in our baby formula with pot ash

01:07

All right well these are the kinds questions of production

01:09

function answers and well then businesses can allocate their resource

01:13

is in the most efficient way possible Well they find

01:16

the point on the graph where they get the most

01:18

out of what they're putting in and that's what they

01:20

shoot for McDonald's is slowly replacing human workers with robots

01:25

Well how do they know if it's a good investment

01:27

Well they asked the production function or at least look

01:30

at it a fry flipping robot Kaswell ten thousand dollars

01:33

at volume It costs another two thousand dollars a year

01:36

in maintenance and appreciation per year and that fry flipping

01:39

baht can cover one friar And there are five fryers

01:42

at the restaurant so it takes five bots to replace

01:45

one worker or about fifty grand to replace that one

01:49

worker Wealthy company does some trials and finds that a

01:51

fry flipping robots can do the job two times faster

01:54

than one person In actuality or reality that person cost

01:58

twenty dollars an hour after salary of fifteen bucks and

02:02

then taxes and all the everything's company has to pay

02:04

pension health care all that stuff So over the course

02:06

of a year a fulltime fried flipper cost McDonald's forty

02:09

thousand dollars well to replace the employees the company needs

02:13

five bots costing a total of fifty grand It'll cost

02:16

another ten thousand dollars total in the maintenance and appreciation

02:19

But the Frye body is twice as fast as the

02:22

worker meaning McDonald's Khun turnover twice a cz many fries

02:26

So you'd need to workers to match the output of

02:29

the fry bots Well the bots cost say sixty thousand

02:32

dollars in Year one And yes we're making up a

02:34

lot of numbers The workers costal eighty thousand those two

02:37

workers But the company is already in the black They've

02:40

made twenty thousand dollars in savings by replacing those low

02:44

skilled workers with robots Well the production function can have

02:47

many variables in practice The production function depends on the

02:50

product being produced Different products require different levels of inputs

02:55

and the relationships between the inputs are different That cab

02:58

all of relationships includes things like land and labor and

03:02

capital in raw materials and time However many of these

03:06

dropout is being irrelevant or they get combined and kind

03:09

of fade away Key idea here is that the simple

03:12

version of all of this has two variables to variable

03:15

inputs There's labor that's usually represented by a big fancy

03:18

capital L And then there's capital that's usually represented by

03:21

you Hey there And this combo gives you the quantity

03:24

of output like in the equation And this gets a

03:27

queue right Belle Plus Que is cute that's in its

03:30

simplest form and that's the production function And that's what

03:33

it looks like The amount of labour and the amount

03:35

of capital gives you the amount of output The production

03:38

function can help measure the marginal productivity of one factor

03:41

of production It can also help figure out the least

03:44

expensive and most efficient way to make a product like

03:48

Say you're going to make pies with Grandma You're going

03:50

to need to spend a little capital on ingredients and

03:53

you know pie tins Well that's the capital That's the

03:56

big K You've also got labor That's you And grandmama

03:59

That's the big Al there for labor Enough for losers

04:01

Sorry Grandma Alright now onto your production function right there

04:04

Well you could decide whether getting some more money for

04:07

ingredients will help you bake more pies Or if you

04:10

call your cousins to help with the baking and Ad

04:13

Tio El there Or you could do both Now we

04:15

just need to talk to Grandma about her musical taste 00:04:17.677 --> [endTime] Yeah

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