Production Theory
PRODUCTION THEORY AND THEORY OF COSTS
Production and Production Theory
Production refers to the transformation of inputs into outputs (or products)
An input is a resource that a firm uses in its production process for the purpose of creating a good or service.
Most resources are lumped into three categories:
- Land
- Labor
- Capital
The two kinds of inputs: Fixed vs. Variable Inputs
Fixed inputs -resources used at a constant amount in the production of a commodity.
Variable inputs - resources that can change in quantity depending on the level of output being produced.
The longer planning the period, the distinction between fixed and variable inputs disappears, i.e., all inputs are variable in the long run.
The Production Function and the Law of Diminishing Marginal Returns
The production function refers to the physical relationship between the inputs or resources of a firm and their output of goods and services at a given period of time, ceteris paribus.
The production function is dependent on different time frames. Firms can produce for a brief or lengthy period of time.
Law of Diminishing Marginal Returns
All other things remaining constant, if only one input is increased a point will be reached where each additional input produces less output than the previous input.
Law of Diminishing Returns: After a certain point, when additional units of a variable input are added to a fixed input, the marginal product of each additional variable input is less than the previous input.
Diminishing returns always apply in the short run, and in the short run every firm will face diminishing returns. This means that every firm finds it progressively more difficult to increase its output as it approaches capacity production.
Production Analysis with One Variable Input
Total product (Q) refers to the total amount of output produced in physical units (may refer to, kilograms of sugar, sacks of rice produced, etc)
The marginal product (MP)
Production and Production Theory
Production refers to the transformation of inputs into outputs (or products)
An input is a resource that a firm uses in its production process for the purpose of creating a good or service.
Most resources are lumped into three categories:
- Land
- Labor
- Capital
The two kinds of inputs: Fixed vs. Variable Inputs
Fixed inputs -resources used at a constant amount in the production of a commodity.
Variable inputs - resources that can change in quantity depending on the level of output being produced.
The longer planning the period, the distinction between fixed and variable inputs disappears, i.e., all inputs are variable in the long run.
The Production Function and the Law of Diminishing Marginal Returns
The production function refers to the physical relationship between the inputs or resources of a firm and their output of goods and services at a given period of time, ceteris paribus.
The production function is dependent on different time frames. Firms can produce for a brief or lengthy period of time.
Law of Diminishing Marginal Returns
All other things remaining constant, if only one input is increased a point will be reached where each additional input produces less output than the previous input.
Law of Diminishing Returns: After a certain point, when additional units of a variable input are added to a fixed input, the marginal product of each additional variable input is less than the previous input.
Diminishing returns always apply in the short run, and in the short run every firm will face diminishing returns. This means that every firm finds it progressively more difficult to increase its output as it approaches capacity production.
Production Analysis with One Variable Input
Total product (Q) refers to the total amount of output produced in physical units (may refer to, kilograms of sugar, sacks of rice produced, etc)
The marginal product (MP)