Ê

 

The process of production ensures the selection of required inputs in order to

maximize the required level of output. Pure water production has been one of
the recent small scale businesses that ensure quality drinking water for the
citizen at an affordable price and save as a source of income to individual
and employment opportunities. The production process is usually
represented in the form of production function.

Production function is a function that specifies the output of a firm, an

industry, or an entire economy for all combinations of inputs. The maximum
output of a technologically-determined production process is a mathematical
function of input factors of production. Alternatively, a production function can
be defined as the specification of the minimum input requirements needed to
produce designated quantities of output, given available technology. It is
usually presumed that unique production functions can be constructed for
every production technology.

The study is set out to determine most economic way of producing the sachet
water within University of Maiduguri Campus via estimation of economic
efficiency of production. The method of production is that of capital intensive
due to efficiency in production process.

x 
 
 


Production refers to the economic process of converting inputs into outputs.

Production uses resources to create goods or services that are suitable for
exchange. This can include manufacturing, storing, shipping, and packaging.
A production process can be defined as any activity that increases the
similarity between the pattern of demand for goods and services, and the
c
quantity, form, and distribution of these goods and services available to the
market place.

The production of pure water (sachets water) is one of these processes

which involve the conversion of resources inputs so as to produce a given
level of output. The process involves the use of labour, capital and raw
materials.

The process can be technically efficient or economically efficient. Technical

efficiency is the ability to produce a given level of output using the fewest
resources possible. Efficient production is achieved when a product is
created at its lowest average total cost. In other words technical efficiency
entails use of less inputs resources to produce a given level of output and no
more of other resources. Economic efficiency relates to the prices of the
factor inputs i.e. a production process is said to be efficient only if it produces
at the lowest possible cost by using the least cost criterion. Economic
efficiency does not entail low quality. Therefore the major concern of
producer is not technical efficiency but rather that of economic efficiency so
as to maximize profit through cost minimization.




   

The blind involvement of individuals, corporate bodies and agencies in

production has resulted in an inefficient production process thereby leading
to resources wastage. The aim of any producer is to produce as much as
possible given the level of available resources. Most often the production
process will require the determination of a suitable point where combination
of inputs will yield the maximum outputs. This entails technical efficiency

¦
whereas the ultimate goal of an enterprise is profit maximization through cost
minimization.

Therefore the cardinal point is the determination of economic efficiency once

achieved technical efficiency will set in. This is because every economically
efficiency production is a technical one.

G 
 
 


The study is generally aimed at determining economic efficiency in the

production of pure in University of Maiduguri. The study also has the
following specific objectives:

i. To determine the production function of the pure water production

ii. To determine the technically efficient production of pure water
iii. To determine the economically efficient production function of pure water
production





Thestudy used a pure water manufacturing firm within the University campus
as its case study. The firm uses capital intensive method of production
because of its efficiency in terms of cost minimization. The company has two
men on each of the two machines which are designed to produce
approximately 1000 sachets of 50cl per hour and works 12 hours per day.
The laborers are used to package the 50cl into a bag of twenty.

  

 

The scope of the study is restricted to the estimation of economic efficiency

of pure water production within University of Maiduguri (which has only one
0
functional company). Because of this limitation the study is restricted to the
activity of the company. The choice of the method is also restricted to the
only method used by the company which is capital intensive in nature.

" 
    

In micro-economics, a production function is a function that specifies the

output of a firm, an industry, or an entire economy for all combinations of
inputs. Almost of all macroeconomic theories, like macroeconomic theory,
real business cycle theory, neoclassical growth theory (classical and new)
presupposes (aggregate) production function. Heckscher-Ohlin-Samuelson
theory in international trade theory also presupposes production function. In
this sense, production function is one of the key concepts of neoclassical
macroeconomic theories (Moffatt, 200). It is also important to know that there
is a subversive criticism on the very concept of production function.

A production function is a function that specifies the output of a firm, an

industry, or an entire economy for all combinations of inputs. A meta
productioncompares the practice of the existing entities converting inputs X
into output y to determine the most efficient practice production function of
the existing entities, whether the most efficient feasible practice production or
the most efficient actual practice production (Mishra, 2007). In either case,
the maximum output of a technologically-determined production process is a
mathematical function of input factors of production. Put another way, given
the set of all technically feasible combinations of output and inputs, only the
combinations encompassing a maximum output for a specified set of inputs
would constitute the production function. Alternatively, a production function
can be defined as the specification of the minimum input requirements
needed to produce designated quantities of output, given available
º
technology. It is usually presumed that unique production functions can be
constructed for every production technology (Koutsoyiannis 1979).

By assuming that the maximum output technologically possible from a given

set of inputs is achieved, economists using a production function in analysis
are abstracting away from the engineering and managerial problems
inherently associated with a particular production process. The engineering
and managerial problems of technical efficiency are assumed to be solved,
so that analysis can focus on the problems of allocative efficiency. The firm is
assumed to be making allocative choices concerning how much of each input
factor to use, given the price of the factor and the technological determinants
represented by the production function (Koutsoyiannis 1979). A decision
frame, in which one or more inputs are held constant, may be used; for
example, capital may be assumed to be fixed or constant in the short run,
and only labour variable, while in the long run, both capital and labour factors
are variable, but the production function itself remains fixed, while in the very
long run, the firm may face even a choice of technologies, represented by
various, possible production functions (Koutsoyiannis, 1979).

The relationship of output to inputs is non-monetary, that is, a production

function relates physical inputs to physical outputs, and prices and costs are
not considered. But, the production function is not a full model of the
production process: it deliberately abstracts away from essential and inherent
aspects of physical production processes, including error, entropy or waste.
Moreover, production functions do not ordinarily model the business
processes, either, ignoring the role of management, of sunk cost investments
and the relation of fixed overhead to variable costs (Lehmann, 1991).

Œ
The primary purpose of the production function is to address allocative
efficiency in the use of factor inputs in production and the resulting
distribution of income to those factors. Under certain assumptions, the
production function can be used to derive a marginal product for each factor,
which implies an ideal division of the income generated from output into an
income due to each input factor of production (Thompson, 1981).


  
    
 

There are several ways of specifying the production function.

In a general mathematical form, a production function can be expressed as:

· = (
1,
2,
3,...,
)

Where:

· = quantity of output

1,
2,
3,...,
 = factor inputs (such as capital, labour, land or raw materials).

This general form does not encompass joint production, which is a production
process, which has multiple co-products or outputs (Heathfield, 1971).

One way of specifying a production function is simply as a table of discrete

outputs and input combinations, and not as a formula or equation at all.
Using an equation usually implies continual variation of output with minute
variation in inputs, which is simply not realistic. Fixed ratios of factors, as in
the case of laborers and their tools, might imply that only discrete input
combinations, and therefore, discrete maximum outputs, are of practical
interest.

r
One formulation is as a linear function:

· =  + 
1 + 
2 + 
3,...

Where ,,, and  are parameters that are determined empirically.

Another is as a Cobb-Douglas production function (multiplicative):

Other forms include the constant elasticity of substitution production function

(CES) which is a generalized form of the Cobb-Douglas function, and the
quadratic production function which is a specific type of additive function. The
best form of the equation to use and the values of the parameters (,,, and
) vary from company to company and industry to industry. In a short run
production function at least one of the
's (inputs) is fixed. In the long run all
factor inputs are variable at the discretion of management (Koutsoyiannis,
1979).


  
   
 

Any of these equations can be plotted on a graph. A typical (quadratic)

production function is shown in the following diagram. All points above the
production function are unobtainable with current technology, all points below
are technically feasible, and all points on the function show the maximum
quantity of output obtainable at the specified levels of inputs. From the origin,
through points A, B, and C, the production function is rising, indicating that as
additional units of inputs are used, the quantity of outputs also increases.
Beyond point C, the employment of additional units of inputs produces no
additional outputs, in fact, total output starts to decline. The variable inputs


are being used too intensively (or to put it another way, the fixed inputs are
underutilized). With too much variable input use relative to the available fixed
inputs, the company is experiencing negative returns to variable inputs, and
diminishing total returns. In the diagram this is illustrated by the negative
marginal physical product curve (MPP) beyond point Z, and the declining
production function beyond point C.

Quadratic Production Function

From the origin to point A, the firm is experiencing increasing returns to

variable inputs. As additional inputs are employed, output increases at an
increasing rate. Both marginal physical product (MPP) and average physical
product (APP) is rising. The inflection point A, defines the point of diminishing
marginal returns, as can be seen from the declining MPP curve beyond point
X. From point A to point C, the firm is experiencing positive but decreasing
returns to variable inputs. As additional inputs are employed, output
increases but at a decreasing rate. Point B is the point of diminishing average
returns, as shown by the declining slope of the average physical product
curve (APP) beyond point Y. Point B is just tangent to the steepest ray from
the origin hence the average physical product is at a maximum. Beyond point

‰
B, mathematical necessity requires that the marginal curve must be below
the average curve (Lehmann, 1991).

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There are two special classes of production functions that are frequently
mentioned in textbooks but are seldom seen in reality. The production
function · = (
1,
2) is said to be homogeneous of degree n, if given any
positive constant , (
1,
2) =  (
1,
2). When  > 1, the function exhibits
increasing returns, and decreasing returns when  < 1. When it is
homogeneous of degree 1, it exhibits constant returns. Homothetic functions
are functions whose marginal technical rate of substitution (slope of the
isoquant) is homogeneous of degree zero. Due to this, along rays coming
from the origin, the slope of the isoquants will be the same. Homothetic
functions are of form ( (
1,
2)) where (
) is a monotonically increasing
function (the derivative of (
) is positive ( / 
> 0)), and function (
1,
2)
is a homogeneous function of any degree.

a

  
 

There are two major criticisms against the standard form of the production
function (Mishra, 2007).

G 
   
 


During the 1950s, 60s, and 70s there was a lively debate about the
theoretical soundness of production functions. Although most of the criticism
was directed primarily at aggregate production functions, microeconomic
production functions were also put under scrutiny. According to the
argument, it is impossible to conceive of an abstract quantity of capital which

D
is independent of the rates of interest and wages. The problem is that this
independence is a precondition of constructing an iso-product curve. Further,
the slope of the iso-product curve helps determine relative factor prices, but
the curve cannot be constructed (and its slope measured) unless the prices
are known beforehand.

Often natural resources are omitted from production functions. When Solow
and Stiglitz sought to make the production function more realistic by adding
in natural resources, they did it in a manner that economist Georgescu-
Roegen criticized as a "conjuring trick" that failed to address the laws of
thermodynamics. Neither Solow nor Stiglitz addressed his criticism, despite
an invitation to do so in the September 1997 issue of the journal Ecological
Economics(Wikipedia, 2009).

G 
  
 

The production functions are usually written as above

Q = f(X1, X2, ... , Xn),

where X1, X2, ... , Xn are arbitrarily chosen inputs. But, this is far from what
the firms are doing. Any firm has a well defined design of a product. What is
necessary in this specific production, the inputs are precisely determined.
More realistic description of input-output relations is

s (a1, a2, ..., an) => s, where s is the scale of the production (of any product)
and a1, a2, ..., an are coefficients of various inputs such as parts and
materials which are needed in the production of the product. Usual
expression of production function thus disfigures the basic relationships:

c

which determines which. In the real world, it is the output (the amount of
products) which determines the inputs (Coelli, 1996).

    


 
  
 

The total, average, and marginal physical product curves mentioned above
are just one way of showing production relationships. They express the
quantity of output relative to the amount of variable input employed while
holding fixed inputs constant. Because they depict a short run relationship,
they are sometimes called short run production functions. If all inputs are
allowed to be varied, then the diagram would express outputs relative to total
inputs, and the function would be a long run production function. If the mix of
inputs is held constant, then output would be expressed relative to inputs of a
fixed composition, and the function would indicate long run economies of
scale.

Rather than comparing inputs to outputs, it is also possible to assess the mix
of inputs employed in production. An isoquant relates the quantities of one
input to the quantities of another input. It indicates all possible combinations
of inputs that are capable of producing a given level of output Meeusen,
1997).

Rather than looking at the inputs used in production, it is possible to look at

the mix of outputs that are possible for any given production process. This is
done with a production possibilities frontier. It indicates what combinations of
outputs are possible given the available factor endowment and the prevailing
production technology.

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Ê


An isoquant represents those combinations of inputs, which will be capable

of producing an equal quantity of output; the producer would be indifferent
between them. The isoquants are thus contour lines, which trace the loci of
equal outputs. As the production remains the same on any point of this line, it
is also called equal product curve. Let, Q0 = f(L,K) is a production factor.
Where, Q0 = A fixed level of production.

L = Labour K = Capital

"  
 

  


 

Isoquants are typically convex to the origin reflecting the fact that the two
factors are substitutable for each other at varying rates. This rate of
substitutability is called the ³marginal rate of technical substitution´ (MRTS) or
occasionally the ³marginal rate of substitution in production´ (Koutsoyiannis,
1979). It measures the reduction in one input per unit increase in the other
input that is just sufficient to maintain a constant level of production. For
example, the marginal rate of substitution of labour for capital gives the
amount of capital that can be replaced by one unit of labour while keeping
output unchanged.

J      

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To move from point A to point B in the diagram, the amount of capital is
reduced from Ka to Kb while the amount of labour is increased only from La
to Lb. To move from point C to point D, the amount of capital is reduced from
Kc to Kd while the amount of labour is increased from Lc to Ld. The marginal
rate of technical substitution of labour for capital is equivalent to the absolute
slope of the isoquant at that point (change in capital divided by change in
labour). It is equal to 0 where the isoquant becomes horizontal, and equal to
infinity where it becomes vertical.

The opposite is true when going in the other direction (from D to C to B to A).
In this case we are looking at the marginal rate of technical substitution
capital for labour (which is the reciprocal of the marginal rate of technical
substitution labour for capital) (Wikipedia, 2009).

It can also be shown that the marginal rate of substitution labour for capital, is
equal to the marginal physical product of labour divided by the marginal
physical product of capital.

In the unusual case of two inputs that are perfect substitutes for each other in
production, the isoquant would be linear (linear in the sense of a function
=
 í ). If, on the other hand, there is only one production process available,
factor proportions would be fixed, and these zero-substitutability isoquants
would be shown as horizontal or vertical lines.

When most people think of fundamental tasks of a firm, they think first of
production. Economists describe this task with the production function, an
abstract way of discussing how the firm gets output from its inputs. It
describes, in mathematical terms, the technology available to the firm.

c0
A production function can be represented in a table such as the one below. In
this table five units of labor and two of capital can produce 34 units of output.
It is, of course, always possible to waste resources and to produce fewer
than 34 units with five units of labor and two of capital, but the table indicates
that no more than 34 can be produced with the technology available. The
production function thus contains the limitations that technology places on
the firm.

The production function thus contains the limitations that technology places
on the firm.

Labour
5 30 34 37
4 30 30 33
3 21 25 28
2 16 20 23
1 10 13 15
Capital 1 2 3

d   

The production function can also be illustrated in a graph such as that below.
This graph looks exactly like a graph of indifference curves because the
mathematical forms of the production function and the utility function are
identical. In one case, inputs of goods and services combine to produce
utility; in the other, inputs of resources combine to produce goods or
services. A curved line in the graph shows all the combinations of inputs that
can produce a particular quantity of output. These lines are called .
As one moves to the right, one reaches higher levels of production. If one

cº
can visualize this as a three-dimensional graph, one can see that the
production surface rises increasingly high above the surface of the page; the
isoquants indicate a hill. The firm must operate on or below this surface.

Source: Wikipedia.com

 !""#$$Êa!ÊG#

The study was undertaken to estimate the economic efficiency in the

production of pure water (Sachet water) within University of Maiduguri
campus. The method of data collection was that of primary data through the
use of interview and observation by the researchers.

Our findings came up with the following facts about the production.

1. There is only one production method which is capital intensive in nature

2. There are two machines used in the production that work for twelve hours
per day
3. Every machine requires only two workers as labourers, who work for 12
hours
cŒ
4. Fuel consumption of the machine is 60 litres per day (i.e. 12 hours)
5. Each machines is able to produce 1000 sachets per hour
6. Every worker is able to package 500 bags of 20 sachet per day
7. Raw materials used include:-
a. Chlorine (0.42kg per day @ N8.92)
b. Polythene bags (8,000 kg @ 3500 per day)
c. Labour cost N1,000 per day
d. Fueling cost N6,500 per day
e. Machine maintenance cost approximately N2,500 per day
8. Daily production per day averagely 12,000 sachets

Therefore with the above information we came up with the following

statement:

The daily production depends on the following inputs:

a. Cost of chlorine
b. Polythene cost
c. Labour cost
d. Fueling and
e. Maintenance cost.

Q = f(Cc+Pc+Lc+Fc+Mc+U)

Where Cc = Cost of chlorine

Pc = Polythene cost
Lc = Labour cost
Fc = Fueling cost
Mc = Maintenance cost

cr
U = unobserved variables

Due to the restriction and limited production method, we present the following
equation

Q = 8.92 + 3,500 + 1,000 + 6,500 + 2,500

= 13,508.92

Our findings reveal that in order to produce the daily output of 12,000 sachets
the above cost must be incurred which is the least cost. Hence the economic
efficiency of production of sachet water within the Campus is N13,508.92 to
produce a given output of 12,000 sachet.

 a     
 

This study was undertaken to estimate the economic efficiency of production

of sachet water within University of Maiduguri campus. Economic efficiency
of production entails the minimum cost of producing a given level of output. It
is that output level whereby the cost of production at minimum level.

In conclusion, the production process of pure water within University is

capital intensive due to the fact that cost of production is minimized with little
wastage, low labour cost and a continuous production process. The only
constraints is the where there is machine breakdowns, for this purpose, two
machines are used interchangeably and works for an average of 12 hours
per day. A regular machine maintenance is undertaken to ensure smooth
operation and early detection of mechanical faults.

The study recommends the following:

c
1. A more incisive study should be undertaken to monitor the production
process for at least one month
2. Compare other manufacturing firms outside the campus
3. Check for more sophisticated machines that will be more productive
4. The cost of the machine should have a direct bearing with the output (in form
of depreciation)
5. More complicated software can be used to estimate the economic efficiency
of pure production within Maiduguri Metropolitan Council to assess which of
the company has the most efficient method of production.
6. Government should provide enabling environment for better production such
provision of electricity and other necessary social amenities as well as
regulating the production process to ensure quality and safety.

   #a 

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Macmillan Press Ltd London.
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Production Function", in The Review of Economics and Statistics, Volume
56(1), February 1974,
http://homepage.newschool.edu/~AShaikh/humbug.pdf
3. Anwar Shaikh, "Laws of Production and Laws of Algebra²Humbug II", in
Growth, Profits and Property ed. by Edward J. Nell. Cambridge, Cambridge
University Press, 1980.
http://homepage.newschool.edu/~AShaikh/humbug2.pdf

c‰
4. Cohen, A.J. and Harcourt, G.C. (2003) "Retropectives: Whatever Happend to
the Cambridge Capital Theory Controversies?"     
d , c (1).
5. Daly, H (1997). "Forum on Georgescu-Roegen versus Solow/Stiglitz".
   ¦¦ (3).
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Trans-Log, and Diewert Production Functions.
7. Heathfield, D. F. (1971) d   , Macmillan studies in
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Glossary - Terms Beginning with M. Accessed March, 2010
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technological progress,         , vol 24,
September 1975,
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   , vol XXI, 1953,
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http://www.scribd.com/doc/417083/A-Brief-History-of-Production-Functions
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        , Princeton
University Press, Princeton NJ.
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 , 3rd edition,
Prentice Hall, Englewood Cliffs.
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cD
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