Production function

The production function is a statement of the relation between the volumes of the inputs and the outputs of a production process. Its form has implications for the concept of economic equilibrium and it is widely used in the construction of economic models.

Returns to scale - interpretation

The relation between the inputs to a production process and its output is conventionally termed the "returns to scale" of that process, but economists have placed a restricted interptetaion upon that term. Marshal interpreted it to mean what happens when producers make the most efficient possible use of existing technology. (That restriction limits the possibility of empirical verification: it excludes the use of a time series of observations because of the possible intervention of changes of technology andy changes of technique due to learning, and other sources of data are hard to find.) He also drew a distiction between what happens in the short run, before the production manager is able to correct an imbalance between the quantities of labour and capital; and the long run during which the optimum proportion of capital to labour can be restored. Economists have also reasoned that to apply the concept to a single production unit would be to overlook possible interactions with competitors who might be assumed to be bidding for the same input resources. Consequently economists usually take it for granted that the term can be validly applied only to industries or to groups of industries. In the absence of convincing empirical evidence, the subject has usually been approached by postulating plausible relationships and adopting those that prove useful in a wider context.