Question

1. Briefly but clearly explain the concept of production function and cost function of a typical firm in both LR and SR.

Answer 1

The production function shows the relationship between physical inputs referred to as factors of production and output. Thus, output is considered to be a dependent variable and factors of production as independent variables in the production process. There are two types of production functions depending on the time period:

1. Short Run Production Function: In the short run some factors of production are fixed and some factors of production are variable. Thus, the short run production function has the property of law of diminishing marginal returns and output produced is low as compared to the output produced in the long run.

2. Long Run Production Function: In the long run, however, all the factors of production are variable. Thus, there is no diminishing marginal returns to a factor of production. The output produced in the long run is also more than the output produced in the short run.