Capacity constraints

To supply goods and services to the market, you need more than ambition. No matter how large a business is or who owns it, all businesses confront one central fact: it costs something to produce goods. To produce corn, a farmer needs land, water, seed, equipment, and labor. To produce fillings, a dentist needs a chair, a drill, some space, and labor. Even the "production" of educational services (e.g., this economics class) requires the use of labor (your teacher), land (on which the school is built), and some capital (the building and blackboard). In short, unless you are producing unrefined, unpackaged air, you need factors of production – that is, resources that can be used to produce a good or service.

The factors of production used to produce a good or service provide the basic measure of economic cost. The costs of your economics class, for example, are measured by the amounts of land, labor, and capital it requires. These are resource costs of production.

An essential question for production is how many resources are actually needed to produce a given product. The answer depends on our technological know-how and how we organize the production process. At any moment, however, there is sure to be some minimum amount of resources needed to produce a good. Likewise, there will always be some maximum amount of output attainable from a given quantity of resources. These limits to the production of any good are reflected in the production function. The production function tells us the maximum amount of good X producible from various combinations of factor inputs. With one chair and one drill, a dentist can fill a maximum of 32 cavities per day. With two chairs, a drill, and an assistant, a dentist can fill up to 55 cavities per day.

A production function is a technological summary of our ability to produce a particular good. Table 1 provides a partial glimpse of one such function. In this case, the desired output is designer jeans, as produced by Tight Jeans Corporation. The essential inputs in the production of jeans are land, labor (garment workers), and capital (a factory and sewing machines). With these inputs, Tight Jeans can produce and sell fancy jeans to status-conscious consumers.

As in all production endeavors, we want to know how many pairs of jeans we can produce with available resources. To make things easy, we shall assume that the factory is already built, with fixed space dimensions. The only inputs we can vary are labor (the number of garment workers per day) and additional capital (the number of sewing machines we lease per day).

As you would expect, the quantity of jeans we can produce depends on the amount of labor and capital we employ.The purpose of a production function is to tell us just how much output we can produce with varying amounts of factor inputs. Table 5.1 provides such information for jeans production.

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