Managerial Economics and Strategy, 2/e

5.1 Production Functions

A firm uses a production process to transform inputs or factors of production into outputs. Firms use many types of inputs. Most of these inputs can be grouped into three broad categories:

• Capital (K). Services provided by long-lived inputs such as land, buildings (such as factories and stores), and equipment (such as machines and trucks)

• Labor (L). Human services such as those provided by managers, skilled workers (such as architects, economists, engineers, and plumbers), and less-skilled workers (such as custodians, construction laborers, and assembly-line workers)

• Materials (M). Natural resources and raw goods (e.g., oil, water, and wheat) and processed products (e.g., aluminum, plastic, paper, and steel)

The output ...