def. Marginal Product. The additional output in units of good giving additional input (labor or capital)

def. Marginal Revenue Product. The additional output in units of dollars ($) given one unit of additional input (labor or capital)

def. Law of Diminishing Marginal Product. As the input increases over a certain point, the marginal product of the input decreases. This happens for both labour and capital in production functions.

  • Mathematically, There exists some such that:

Returns to Scale

Production functions are one of three types:

  1. Decreasing Returns to scale:
  2. Constant Returns to scale:
  3. Increasing Returns to scale:

Micro Production Function

Short Run

def. SR Production function. where denotes labor input, and denotes capital input. Range is the units of output good.

  • Short Run (SR) is defined as the timeframe where can be varied, but is fixed.
  • Also known as production frontiers or producer choice sets.
  • While production frontiers can take on any shape, the most common shape is that of (b) (due to Law of diminishing marginal product).

def. SR Marginal Product of Labor () The marginal change in output with a unit more of labor.

  • In the short-run production function, that is the gradient of the function, i.e. .

Long Run

Macro Production Function

Homogenous Function