Economic Efficiency

The production function incorporates the technically efficient method of production. Here, the latest technological processes are used. When the economists use production functions, they assume that the maximum level of output is obtained from any given combination of inputs. It means, they assume that production is technically efficient.

When producers are faced with input prices, the problem is not technical but economic efficiency. How to produce a given amount of output at the lowest possible cost? To be economically efficient, a producer should determine the combination of inputs that solves this problem.

What is technical inefficiency? If, for example, an alternative process can produce the same amount of output using less of one or more inputs and the same amount of all others, the first process is technically inefficient.

If, however, the second process uses less of some inputs but more of others, the economically efficient method of producing a given level of output depends on the prices of the inputs. One might cost less but actually be less technically efficient

Classifying Inputs

1. Fixed Input

A fixed input is one that is required in the production process. The amount of the fixed input employed is constant over a given period of time regardless of the quantity of output produced.

2. Variable Input

It is the one whose quantity employed in the production process is varied, depending on the desired quantity of output to be produced.

Time Frames

1. Short-run

It is a period of time in which one or more of the inputs are fixed.

2. Very Short-run

It is a period of time in which all resources are fixed.

3. Long-run

It is a time period which is long enough so that all resources can be varied.