
LERNER INDEX: The difference between price (p) and marginal cost (mc) as a fraction of price, that is [pmc]/p. The Lerner index is usually taken as an indicator of market power because the larger the index, the larger the difference between price and marginal cost, that is, the larger the distance between the price and the competitive price. The Lerner index depends on the elasticity of demand. The Lerner index is also called the pricecost margin.
Visit the GLOSS*arama




PRODUCTION FUNCTION: A mathematical relation between the production of a good or service and the inputs used. A production function captures the general relation between total production and one or more inputs. The standard production function includes labor and capital as the inputs. However, a production function is general enough that any number of inputs can be included A production function provides an abstract mathematical representation of the relation between the production of a good and the inputs used. A production function is usually expressed in this general form:where: Q = quantity of production or output, L = quantity of labor input, and K = quantity of capital input. The letter "f" indicates a generic, as of yet unspecified, functional equation. The analysis of shortrun production is commonly performed at the introductory level with simple tables and graphs. These are useful abstraction methods for isolating and analyzing key aspects of shortrun production. However, mathematical equations are another, often more powerful, method of abstract analysis. This is where the production function comes into play. Because a mathematical equation can extend beyond the two dimensions of a graph, it is possible to consider relations beyond just that for a variable input and total production. If the production function takes the form of a specific equation (such as Q = 5L + 10K + 2LK), then a total product curve relating total product and the variable input can be plotted. However, to do so, one of the two inputs (L or K) must be designated as a variable input and one designated as a fixed input. For most types of production, labor is more readily changed than capital, so L is generally the variable input and K is usually the fixed input. A shortrun total product curve can then be derived by "fixing" K at a particular value, then plotting the values of Q for alternative values of L. While a great deal of economic insight into shortrun production decisions of a firm and market supply curves can be analyzed with a simple graph, when economists begin using mathematical equations, such as the production function, Q = f(L, K), the possibilities are almost unlimited. A wide assortment of additional input variables can be added to this equation to make it, not only more sophisticated, but also more revealing. For example, the effect of education and human capital on production can be seen by adding the educational attainment of workers as another input variable. In addition, the alternative impact on production of different types of capital, such as fixed structures and equipment can be identified by separating capital into two variables. In addition, to identify how public infrastructure, like highways and streets, affects production, then a variable for this input can be added to the production function.
Recommended Citation:PRODUCTION FUNCTION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 20002024. [Accessed: February 27, 2024]. Check Out These Related Terms...           Or For A Little Background...                And For Further Study...          
Search Again?
Back to the WEB*pedia



BEIGE MUNDORTLE [What's This?]
Today, you are likely to spend a great deal of time at a flea market wanting to buy either a wall poster commemorating Thor Heyerdahl's Pacific crossing aboard the KonTiki or decorative garden figurines. Be on the lookout for the happiest person in the room. Your Complete Scope
This isn't me! What am I?


Helping spur the U.S. industrial revolution, Thomas Edison patented nearly 1300 inventions, 300 of which came out of his Menlo Park "invention factory" during a fouryear period.


"Believe and act as if it were impossible to fail."  Charles F. Kettering


BOJ Bank of Japan


Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.
User Feedback

