Production functions aren’t given. They have to be discovered. This is what entrepreneurship is about; the superiority of Austrian over neoclassical economics lies in seeing this fact.
That’s Chris Dillow, commenting on his blog on the Times piece posted earlier by Mark Thornton. Additional commentary here.
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Neoclassical shows a beautiful production and utility function, but.. how can these be calculated??
Martin, for the pure competition functions, they use their imaginations. But for a production function for a company you would use regression analysis. To do that, get historical data on sales and convert it to sales per unit of output. Then do the same with costs. Next, regress historical output on first sales and then costs. For costs, use a quadratic regression equation so that you’ll get a smile-shaped curve. You’ll come up with two equations, one for the per unit cost of goods as output varies, and a similar one for sales. There are several methods for optimizing these equations, but the simplest is to graph the two together. The cost equation should have a slight curve to it. Find the lowest point on the cost curve and trace horizontally to the cost/price vertical axis and that’s you’re optimum production quantity and, by the way, your optimum price to achieve that level of production.
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