If, as suggested in Chapter 8, the most obvious common feature of firms is that they are all involved in production (defined as the process of transforming inputs into outputs), the relationship between quantities of inputs and the resultant quantity of output is of fundamental importance to them. Indeed, although this relationship, known as the production function, is essentially an engineering or technological relationship, it ranks alongside the utility function as one of the more basic determinants of the allocation of resources in a market economy. In general terms it can be expressed as
q = f(y1, y2, …, yn), (9.1)
where y1, y2, …, yn are the quantities of the different inputs employed and q is the maximum output per period that can be produced with those inputs. It thus essentially indicates what is technically feasible with given quantities of inputs.