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    Production Theory

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    Dearla Bitoon
    The document discusses the theory of production, which analyzes the relationship between inputs used in the production process and the outputs produced. It defines inputs as the resources used, such as labor, capital, and land, and outputs as the goods and services created. The production function shows the maximum output possible given different input levels. Initially, adding more of a variable input like labor leads to increasing returns but eventually diminishes returns set in. Understanding production theory allows businesses to maximize output and profits given the fixed resources available.

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    Production Theory

    Uploaded by

    Dearla Bitoon
    153 views14 pages
    The document discusses the theory of production, which analyzes the relationship between inputs used in the production process and the outputs produced. It defines inputs as the resources used, such as labor, capital, and land, and outputs as the goods and services created. The production function shows the maximum output possible given different input levels. Initially, adding more of a variable input like labor leads to increasing returns but eventually diminishes returns set in. Understanding production theory allows businesses to maximize output and profits given the fixed resources available.

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    Production theory

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    The document discusses the theory of production, which analyzes the relationship between inputs used in the production process and the outputs produced. It defines inputs as the resources used, such as labor, capital, and land, and outputs as the goods and services created. The production function shows the maximum output possible given different input levels. Initially, adding more of a variable input like labor leads to increasing returns but eventually diminishes returns set in. Understanding production theory allows businesses to maximize output and profits given the fixed resources available.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    153 views14 pages

    Production Theory

    Uploaded by

    Dearla Bitoon
    The document discusses the theory of production, which analyzes the relationship between inputs used in the production process and the outputs produced. It defines inputs as the resources used, such as labor, capital, and land, and outputs as the goods and services created. The production function shows the maximum output possible given different input levels. Initially, adding more of a variable input like labor leads to increasing returns but eventually diminishes returns set in. Understanding production theory allows businesses to maximize output and profits given the fixed resources available.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 14

    THE PRODUCTION

    THEORY
    PRODUCTION refers to the use
    of economic resources to
    create goods and services that
    will be used to satisfy human
    wants.

    THEORY OF PRODUCTION is
    an analysis of the input-output
    relationship
    INPUT refers to the resources
    used to produce goods and
    services.

    OUTPUT refers to the product


    created as a result of the
    combination of input in the
    production process
    PRODUCTION FUNCTION is an
    equation showing the maximum
    output of a commodity that a firm
    can produce per period of time with
    each set of input.

    Input and output are measured in


    physical rather than monetary units.

    Output = f (input) or O = f(I)


    To be more specific, output
    depends on the quality of land,
    labor, and capital available.
    Thus:
    O = f( Ld,Lb,C)
    The production function
    contains the functional
    relationship between output and
    the basic factors of land, labor,
    and capital.
    These basic factors complement
    each other as they are used in the
    production of goods and services.

    Output produced is measured in


    three forms:
    1. Total Product (TP) is the
    combined production of several
    units of a given input.
    2. Marginal Product (MP) is the
    additional output produced by
    an additional unit of the input
    and is equal to ∆TP/∆i
    3. Average Product (AP) refers
    to the average contribution
    per unit of input and is equal
    to TP/i
    Assume that the variable input is labor
    measured in man hours and is combined
    with fixed units of capital and land.
    Quantity of Labor Input Total Product Marginal Product Average Product
    1 10 10 10
    2 22 12 11
    3 37 15 12.3
    4 55 18 13.8
    5 69 14 13.8
    6 77 8 12.8
    7 80 3 11.4
    8 81 1 10.1
    9 81 0 9
    10 80 -1 8
    Initially, the addition of additional
    labor input leads to a
    proportionately greater increase in
    total product or output (TP). This
    results in increasing values of MP
    and AP and corresponds to labor
    input from 1-4. As more input of
    labor are added , Total Product
    continues to increase but already at
    a decreasing rate. This happens
    from the 5th to the 9th input of labor.
    Hence, the Marginal Product and
    Average Product already show
    decreasing values. Upon the
    addition of the 10th input of labor,
    The Marginal Product is now
    negative.
    The stage where Total Product is
    increasing at a fast rate is the stage
    of increasing returns. Here,
    Marginal Product and Average
    Product are both increasing.
    When Total Product is increasing
    at a slower rate and Marginal
    Product and Average Product are
    both decreasing, we have the stage
    of diminishing returns.

    When Total Product decreases


    and as a result Marginal Product is
    negative, we enter the stage of
    negative returns.
    The production behavior leads us
    to the Law of Diminishing Marginal
    Returns. It is in reference to the
    diminishing values of Marginal
    Product (MP)
    The law states that as additional
    output starts to diminish at a certain
    point as additional units of a
    variable input are combined with
    one or more fixed input.
    The reason for this behavior
    can be traced to the constraints
    faced because of the fixed
    resources that are used in
    complement with the variable
    input, which in this case is labor.
    SIGNIFICANCE OF PRODUCTION
    THEORY IN BUSINESS
    A business is engaged in providing
    goods and services to customers with
    the goal of making profits.
    It is therefore important for the
    business proprietor to be aware of the
    production behavior that will maximize
    the output within limited quantities of
    output available.
    This in turn will help maximize profits
    for the enterprise.

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