BAM 040: Managerial Economics

SAS Module #18

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

Lesson title: The Production Function Materials:

Lesson Objectives: Student Activity Sheets
1. I can explain the components of production function. References:
2. I can compute total product, average product and marginal https://courses.lumenlearning.com/
product. boundless-economics/chapter/the-
production-function/Managerial
Economics Business Strategy
Ninth Edition by Baye,Prince,2017
Investopedia.com

“The beautiful thing about learning is that no one

can take it away from you.”

A. LESSON PREVIEW/REVIEW
1) Introduction (2 min)
Hello buddy! We are now in the third and final wave for this subject. I hope you still remember our
previous topics. Our topic today is all about The Production Function. Can you imagine the process of
raw materials undergo to become finished products we now enjoy as consumers? With the help of our
topic, you will understand the different factors affecting the level of production of different business firms.

B.MAIN LESSON
1) Activity 2: Content Notes (18 min)
THE PRODUCTION FUNCTION

The production function relates the maximum amount of output that can be obtained from a given
number of inputs. It describes a boundary or frontier representing the limit of output obtainable from
each feasible combination of inputs. Firms use the production function to determine how much output
they should produce given the price of a good, and what combination of inputs they should use to
produce given the price of capital and labor.
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This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #18

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

Equation: Q = F(K,L)

K = units of capital L = units of labor

Algebraic Forms of Production Function

1. Linear Production Function – inputs are perfect substitutes. There is a perfect linear relationship
between all the inputs and total output.
Equation: Q = aK + bL
Example: Suppose it takes workers at a plant four hours to produce what a machine can make in one
hour. In this case, the production function is linear with a = 4 and b = 1; Eq: Q = 4K + L
If F(5,2), substituting these into the equation Q = 4(5) + 2 will result to Q = 22. This means that 5 units of
capital and 2 units of labor will produce 22 units of output.

2. Leontief Production Function – also called the fixed proportions production function because it implies
that inputs are used in fixed proportions.
Equation: Q = min (aK,bL)
Example: Suppose the production function for a word processing firm is Leontief with a = b = 1; think of
K as the number of keyboards and L as the number of keyboarders The production function then implies
that one keyboarder and one keyboard can produce one paper per hour, two keyboarders and two
keyboards can produce two papers per hour, and so forth. But how many papers can one keyboarder
and five keyboards produce per hour? The answer is only ONE PAPER. Additional keyboards are useful
only to the extent that additional keyboarders are available to use them. Therefore, Leontief production
function uses the minimum between the capital and labor.
Given the equation of Q = min(3K,4L) where K = 5 and L = 2, how much output is produced when 2 units
of labor and 5 units of capital are employed?
Answer: We simply calculate Q = min {3(5),4(2)} = min {15,8}. Between 15 and 8, the minimum is 8,
hence using 5 units of capital and 2 units of labor will produce 8 units of output.

3. Cobb-Douglas Production Function – a production function that lies between linear and Leontief.
This function assumes some degree of substitutability between inputs, albeit not perfect
substitutability.
Equation: Q = K1/2L1/2
Example: Given the function of F(9,4), substituting these figures into equation Q = 9 1/2,41/2 = (3) (2), we
know that 9 units of capital and 4 units of labor will produce 6 units of output.

Total Product
In simple terms, we can define Total Product as the total volume or amount of final output produced by a
firm using given inputs in a given period of time.

Marginal Product
The additional output produced as a result of employing an additional unit of the variable factor input is
called the Marginal Product. Thus, we can say that marginal product is the addition to Total Product
when an extra factor input is used.
*Marginal Product = Change in Output/ Change in Input

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This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #18

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

Thus, it can also be said that Total Product is the summation of Marginal products at different input
levels.
*Total Product = Ʃ Marginal Product

Average Product
It is defined as the output per unit of factor inputs or the average of the total product per unit of input and
can be calculated by dividing the Total Product by the inputs (variable factors).
Average Product = Total Product/ Units of Variable Factor Input

Sample Illustration:

Variable Input Total Product (TP) Average Product Marginal Product (MP)
(AP) (change in TP/change in
(TP/Variable Input)
Input)
0 0 0 0
1 3 3 3
2 8 4 5
3 14 4.67 6
4 19 4.75 5
5 23 4.60 4
6 26 4.33 3
7 28 4.00 2
8 29 3.63 1
9 28 3.11 -1
10 26 2.60 -2
Note: As more variable inputs are used or employed in the production, there will be a point where the
marginal product and average product will start to decrease or fall. This is because of the law of
diminishing marginal returns or utility. This is helpful for managers to assess whether it is beneficial for
the company to add more inputs or not to produce the targeted level output. Managers should add more
inputs in the form of labor and capital so long as the benefits that will be derived will exceed the costs of
employing those inputs.

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This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #18

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

Activity 3: Skill-Building Activities (15min)

Direction: Complete the table below and answer the questions posted after completing the table.
Assume that there is one fixed input and one variable input.
Fixed Input Variable Input Total Product Average Product Marginal Product
(Total (change in Total
Product/Variable Product/change
Input) in Variable Input)
1 0 0 0 0
1 1 100 100 100
1 2 270
1 3 420
1 4 560
1 5 680
1 6 770
1 7 820
1 8 820
1 9 760
1. What can you observe on the average and marginal product?
___________________________________________________________________________________
___________________________________________________________________________________
2. What do you think is the reason for your answer in #1?
___________________________________________________________________________________
___________________________________________________________________________________

Labor Total product

2) Activity 5: Check for Understanding (10min) (students per (dogs groomed per
day) day)
Practice Problem
0 0
1. Bobby runs a dog grooming service, Bobby hires students
to groom dogs. The table to the right shows how many dogs 1 5
Bobby’s service can groom when Bobby’s changes the 2 12
number of students her hires. 3 18
a. a. Complete the table below. 4 22
a. b. Draw Bobby’s average product curve and his 5 25
marginal product curve. When does the marginal
product equals the average product? (Figure A1.11)
Answers:
Labor Average product Marginal
(students per (dogs groomed product (dogs
day per day groomed per
day)

1
2
3
4
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This document and the information thereon is the property of PHINMA Education
 BAM 040: Managerial Economics
SAS Module #18

Name:______________________________________________________________ Class number: _______

Section: ____________ Schedule:_____________________________________ Date:_______________

C. LESSON WRAP-UP
1) Activity 6: Thinking about Learning (5mins)

A. Work Tracker
Congratulations! You are done with our session! Let’s track your progress. Shade the session number
you just completed.

B. Think about your Learning

1. What specific topic in our activity today is hard for you to understand?
__________________________________________________________________________________
________________________________________________________________________________

2. What is your question about the topic?

__________________________________________________________________________________
________________________________________________________________________________

Key to Corrections

Skill Building Activities

Fixed Input Variable Input Total Product (TP) Average Product Marginal Product
(AP) (*) (MP)
(*)
1 0 0 0 0
1 1 100 100 100
1 2 270 135 170
1 3 420 140 150
1 4 560 140 140
1 5 680 136 120
1 6 770 128.33 90
1 7 820 117.14 50
1 8 820 102.50 0
1 9 760 84.44 -60

1. Total product is increasing up to 7 or 8 level of variable input but as additional input is added, it begins to
decrease. Marginal product is also increasing when the level of variable input is 2 but when additional inputs are
added, it also begins to decrease up to the point where it becomes negative. Average product is also increasing
but started to decrease as additional input is employed.

2.This happens because of the law of diminishing marginal returns which was already discussed on our
previous topics.
Submit your activity sheets before the end of the session!

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This document and the information thereon is the property of PHINMA Education