Production Functions and Supply Chains
Introduction We now take a look at what is behind supply-side decision-making, how corporations decide how much to produce and sell. Keep in mind that economic theory assumes that producers are profit-maximizers. This means that producers will expand output only if they expect this action will increase profit. Production Function What is a production function? A production function is a general statement about how a company turns inputs into output. Inputs In some textbooks, inputs are grouped into three categories – land, labor and capital. Land is shorthand for land and natural resources. But land is not an economic resource until farmers use energy, tools, machines, skills and knowledge to turn it into farmland to grow food. Natural resources are also not economic resources. Trees have to be processed to become timber and paper. Iron ore has to be mined and smelted (removed from rocks) and turned into steel. Crude oil, a polluter of water until 1859 (first oi...