Production Functions with Electricity: The Enterprise Level

Abstract

In economics, the relationship between the input and output in production is called the production function [1]. Production function refers to the relationship between part of the input and output as well as the relationship between all of the input and output. This chapter focuses on the production function with electricity consumption. It is the electricity consumption as an input. The enterprise production function with electricity can reflect both the technology level and management level of the production. As described in Chap. 1, electricity used for production has the following characteristics. First, necessity – electricity is required for almost any type of production, for example, the irrigation, threshing, and storage of the provisions; the production of the secondary industry; as well as the distribution, operations, and service of the tertiary industry. Second, accuracy – electricity consumption is a physical quantity which can be read from meters. Electricity consumption data is objective and unbiased. It can also be checked by electricity generation minus loss of transmission and distribution equals to electricity consumption. Thirdly, accessibility – a smart meter can provide us with the electricity consumption per hour (or per 15 min) from the electrical equipment or the production line in a visualized manner. Finally, representativeness – as a productive input, electricity consumption is in proportion to the other production inputs. At a certain level of production process and technology, a unit of electricity as an input requires a corresponding and relatively constant input from other production factors. Therefore, electricity consumption can serve as the representative input indicator of production factors in the enterprise production. Conversely, the output can be described by quantity of product, sales revenue, profits, value added, and other enterprise production indicators, that is, a single representative input indicator and multiple output indicators. Therefore, the enterprise production functions with electricity is composed of production function of the quantity product, production function of revenue, production function of profit, production function of value added, and so on. In Sect. 2.8 of this chapter, Cobb–Douglas production function is introduced, and readers can analyze and compare the difference between the production functions with electricity and the Cobb–Douglas production function.