Technically Efficient Method of Production
Let's suppose that commodity X is produced by two methods by employing capital and labour:
|
Factor inputs
|
Method A
|
Method B
|
|
Labour
|
3
|
4
|
|
Capital
|
4
|
4
|
In the above illustration, method B is inefficient if compared to method A since method B uses more of labour and same amount of capital in comparison to method A. A profit maximising firm won't be interested in inefficient or improvident methods of production. If method A uses less of one factor and more of the other factor as compared with any other method C, then method A and C aren't directly comparable. For illustration, let's suppose that a commodity is produced by 2 methods:
|
Factor inputs
|
Method A
|
Method C
|
|
Labour
|
3
|
2
|
|
Capital
|
4
|
5
|
In the above instance, both methods A and C are technically efficient as well as are included in the production function that one of them would be chosen depends on the prices of factors. The choice of any specific technique from a set of technically efficient methods (ortechniques) is an economic one, based on prices and not a technical one.
In a production function, dependent variable is the output and independent variables are the inputs. So, production function can be represented as
Q = ƒ (N, L, K, E, T)
Where, Q = Quantity Produced, N = Natural resources, L = Labour, K = Capital, E = Entrepreneur or organizer and T = Technology.
For simplicity, just the inputs of capital and labour are considered independent variables in a production function. Generally, land doesn't enter the production function explicitly since of the implicit assumption which land doesn't impose any restriction on production. Though, capital and labour enter production explicitly. A simple specification of a production function is
Q = ƒ (L, K)
Where Q as above, is output, L and K are quantities of labour and capital and ƒ demonstrates the functional relation between output and inputs. Production function is based on an implicit assumption that technology is given. That's because an improvement in technical knowledge will result in larger output from the use of same quantity of inputs.