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The production process consists of the real process and the income distribution process. A result and a criterion of success of the owner is profitability. The profitability of production is the share of the real process result the owner has been able to keep to himself in the income distribution process. Factors describing the production process are the components of profitability, i.e., returns and costs. They differ from the factors of the real process in that the components of profitability are given at nominal prices whereas in the real process the factors are at periodically fixed prices. In economics, a production function relates physical output of a production process to physical inputs or factors of production.

The typical LRAC curve is also U-shaped, reflecting increasing returns of scale where negatively-sloped, constant returns to scale where horizontal and decreasing returns where positively sloped. TheLeontief production functionis a type of function that determines the ratio of input required for producing in a unit of the output quantity. Also, producers and analysts use the Cobb-Douglas function to calculate theaggregate production function. The marginal product is the increase in the quantity of output when one more unit of input is used.

Real income is normally not an addable quantity and in many cases it is difficult to calculate. We see that the real income has increased by 58.12 units from which 41.12 units come from the increase of productivity growth and the rest 17.00 units come from the production volume growth. The total increase of real income (58.12) is distributed to the stakeholders of production, in this case, 39.00 units to the customers and to the suppliers of inputs and the rest 19.12 units to the owners. The sources of productivity growth and production volume growth are explained as follows. Productivity growth is seen as the key economic indicator of innovation. The successful introduction of new products and new or altered processes, organization structures, systems, and business models generates growth of output that exceeds the growth of inputs.

Countries that are rich in human capital experience increased productivity and efficiency. The difference in skill levels and terminology also helps companies and entrepreneurs create corresponding disparities in pay scales. This can result in a transformation of factors of production for entire industries.

The customers’ well-being arises from the commodities they are buying and the suppliers’ well-being is related to the income they receive as compensation for the production inputs they have delivered to the producers. Moysan and Senouci provide an analytical formula for all 2-input, neoclassical production functions. A short run is characterized by the presence of at least one fixed input, with the rest being variable; input refers to factors or elements that directly affect a company’s operations and resulting output.

This time constraint creates a limitation in production capacity in the short run. However, in the long run, the firm can vary its input to produce any quantity of output. However, in reality, many constraints make it difficult for extra workers to produce the same amount as already existing workers. In our example, the first worker will be able to harvest the most because he has access to all the available resources without being limited by other co-workers. Depending on the context, some factors of production might be more important than others.

The production function relates the quantity of factor inputs used by a business to the amount of output that result. It is straightforward to measure how much output is being produced sources kkr 6b in the manufacturing industries like motor vehicles. In the tertiary industry such as service or knowledge industries, it is harder to measure the outputs since they are less tangible.