You are on page 1of 10

Production Theory

Managerial Economics – Peterson, Lewis, Jain
4th Edition, Pearson Publication

 Production uses resources to create a goods or service that is suitable for exchange.  This can include manufacturing. shipping.  . and packaging. storing. Production theory basics  Production refers to the economic process of converting of inputs into outputs.

Factors of production  Raw materials  Machinery  Labour services  Capital goods  Land .

 . and Marginal product  Total Product Curve  The total product (or total physical product) of a variable factor of production identifies what outputs are possible using various levels of the variable input. or a graph that summarizes the data into a “total product curve”. Total. Average.  This can be displayed in either a chart that lists the output level corresponding to various levels of input.

Total. Average. and Marginal product  Total Product Curve .

 The maximum output possible with this production process is Qm. they are assumed to be fixed.  In this example. output increases as more inputs are employed up until point A. and Marginal product  The diagram shows a typical total product curve. Total.)   . Average. (If there are other inputs used in the process.

and Marginal product  The average physical product is the total production divided by the number of units of variable input employed.  If there are 10 employees working on a production process that manufactures 50 units per day.  .Total. then the average product of variable labour input is 5 units per day. It is the output of each unit of input. Average.

Av e ra g e . a n d Ma rg in a l p ro d u c t . verage and Marginal Product Curve To t a l.

and Marginal product  The average product typically varies as more of the input is employed. Total. Average.  . so this relationship can also be expressed as a chart or as a graph.  The marginal physical product of a variable input is the change in total output due to a one unit change in the variable input (called the discrete marginal product) or  Alternatively the rate of change in total output due to an infinitesimally small change in the variable input (called the continuous marginal product).

 Additional information and Calculus .