# 3.1 The Production Function

Jeanne Stansak

Caroline Koffke

## Important Vocabulary

• Inputs—Any resources (such as land, labor, or capital) that is used by firms to product outputs. Ex: a pizza parlor needs inputs such as tomatoes, yeast, and flour
• Costs—Money that is spent to purchase inputs. Ex: in order to get workers (labor) you have to pay wages (a type of cost).
• Outputs—The finished goods and services that firms produce in order to make revenue. Ex: a toy company's outputs are different types of toys
• Revenue—This the all money received by a firm (Price x Quantity). Ex: If Mattel sells their Barbie doll for \$10 and they sell 100 of the dolls, then their revenue is \$1000.
• Total product (TP)—the total quantity of output produced by a firm in the market.
• Average product (AP)—The quantity of total output produced per unit of input used in the production process (Total Product / Units of Inputs).
• Marginal product (MP)—The quantity of total output produced by each additional unit of input used in the production process. This is calculated by dividing the change in total product by the change in inputs used.
• Increasing Marginal Returns—Each additional variable input is more productive than the last. MP and AP increase, as each variable input specializes in its task and utilizes fixed inputs. TP increases at an increasing rate.
• Decreasing Marginal Returns—Each additional variable input is less productive than the last. MP and AP decrease as specialization decreases, and there are not enough fixed inputs. TP increases, but at a slower rate.
• Negative Marginal Returns—Each additional variable input gets in the way of production. AP decreases and MP becomes negative, as specialization is impossible with too many variable inputs. TP decreases.
• Law of Diminishing Marginal Returns—The economic law that dictates that, as variable resources are added to fixed resources, the additional output produced from each new input will eventually fall. Basically, at some point, each additional worker used in the production process becomes less productive.
Here is a typical chart that uses all of the vocabulary listed above.
The above graph shows how total product, average product, and marginal product are related when placed on a graph. There are some basic facts about how these particular curves are related:
• When marginal product is increasing, total product is increasing at an increasing rate. The slope is steeper.
• When marginal product is decreasing, total product is increasing at a decreasing (slower) rate. The slope is less steep.
• When marginal product becomes negative, total product is decreasing.

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