Definition of Production Function The technological relationship between inputs and output of a firm is generally referred to as the production function. The production function shows the functional relationship between the physical inputs and the physical output of a firm in the process of production. According to Samuelson, “The production function is the Technical relationship telling the maximum amount of output capable of being produced by each and every set of specified inputs. It is defined for a given set of technical knowledge.” According to Stigler, “The production function is the name given to the relationship between the rates of input of productive services and the rate of output of product. It is the economist’s summary of technical knowledge. In fact the production function shows the maximum quantity of output. Q, that can be produced as a function of the quantities of inputs X1, X2, X3…Xn. In equation form the Continue reading
Economics Concepts
Duality between Production Function and Cost Function
Production functions and cost functions are the cornerstones of business and managerial economics. A production function is a mathematical relationship that captures the essential features of the technology by means of which an organisation metamorphoses resources such as land, labour and capital into goods or services such as steel or cement. It is the economist’s distillation of the salient information contained in the engineer’s blueprints. Mathematically, let Y denote the quantity of a single output produced by the quantities of inputs denoted (x1,…, xn). Then the production function f(x1,…,xn) describes how a given output can be produced by an infinite combinations of inputs (x1,.., xn), given the technology in use. Several important features of the structure of the technology are captured by the shape of the production function. Relationships among inputs include the degree of substitutability or complementarily among pairs of inputs, as well as the ability to aggregate groups Continue reading
Objectives of Fiscal Policy
By fiscal policy we mean, the government’s tax efforts, public expenditure and public borrowing. Through these the government can effectively encourage consumption, investment and savings habits and also restrict them. For example, suppose there is inflation in a country. Inflation implies that the people have high purchasing power and so they demand goods. To curb this, the government may raise the personal tax and also the corporate tax. Similarly, by altering its expenditure on various public projects, the government would be able to influence the prevailing economic condition. Public borrowing involves government issuing bonds and encouraging common public and other institutions to buy them. By this, the government would be able to bring down the level of purchasing power in the economy and control the inflation. The following are the objectives of fiscal policy: Maximization of the aggregate saving is the first objective. Tins are achieved by encouraging people Continue reading
Schumpeter’s Innovation Theory – Mechanism, Principles, Strengths, and Limitations
Schumpeter’s Innovation Theory provides that the leading role of an entrepreneur in the economic field is the introduction of innovations from which the reward is gaining profits. The model stipulates that entrepreneurship plays a decisive role in fiscal development and that successful creativities are the only way to achieve such goals as financial stability within an organization. It explains that invention could occur in such ways as launching or upgrading a product, introducing new production methods, acquiring advanced supply sources, and bringing unique business structures. The business approach was developed by Joseph Alois Schumpeter, an Austrian political economist and foundational contributor to the topic of development and technological advancements. The idea is based on the more elaborate theory of monetary growth, which focuses on entrepreneurship and its role in industrial empowerment with innovativeness as the linkage. In this regard, Schumpeter worked towards defining and explaining the change in a perspective Continue reading
Definition and Meaning of Economic System
Economic system refers to the organizations and institutions created for the purpose of satisfying the wants of human beings. In a country, available resources have to be utilized to manufacture and distribute goods and services, which would meet the needs of the people so that they are satisfied. These institutions and organizations function with their own rules and regulations. The economic system has certain broad characteristics. The economic system always functions with scarcity of resources. How the system effectively and efficiently uses the resources will determine the extent to which the needs of the people are met. An economic system comprises people. That is, a society of human beings alone can constitute economic system. A set of institutions are created and used for the purpose of smooth functioning of an economic system. For example, banks, money, technology, government, price mechanism, planning etc., are all institutions through which the systems Continue reading
Types of Demand
Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. generally resulting in market equilibrium where products demanded at a price are equaled by products supplied at that price. Demand depends on the price of the commodity and refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Read: Concept of Demand in Managerial Economics The different types of demand are; i) Direct and Derived Demands Direct demand refers to demand for goods meant for final consumption; it is the demand for consumers’ goods like food items, readymade garments and houses. By contrast, derived demand refers to demand for goods which are needed Continue reading