ABSTRACT
A production function is a graphical or mathematical statement of the relationship between the amount of output and the quantity of inputs. These functions may describe the output response to variations in input for industries, firms, or areas. Inputs may be measured in terms of quantity of labor, area of land, value of capital equipment, or the quantity or value of any other input for which the response to output is needed. Output may be measured as the physical quantity of a single output, or as the total value of a combination of outputs. When inputs such as labor and capital equipment are combined, they require a common unit of measurement such as cost. Theoretically, the most desirable production function describes the physical output response to variations in the physical quantities of inputs under a given technology. However, since the parameters of such functions are very difficult to estimate, production functions are generally estimated in terms of the value of the output response to changes in the value of the inputs. The parameter estimates are therefore influenced by the differential pricing of the outputs and inputs.
