Production Theory

Theory of Cause and Market Structure

Submitted by: Alexander Esto
Submitted to: Rowena Rufo
Production Theory
-Theory of production, in economics, an effort to explain the principles by which a business
firm decides how much of each commodity that it sells or it will produce, and how much of each
kind of labour, raw material, fixed capital good, etc., that it employs or will use. In economics, a
production function gives the technological relation between quantities of physical inputs and
quantities of output of goods. The diminishing marginal return In economics, diminishing returns
is the decrease in the marginal output of a production process as the amount of a single factor of
production is incrementally increased, while the amounts of all other factors of production stay
constant. A long run is a period of time in which all factors of production and costs are variable].
In response to expected economic profits, firms can change production levels. The short run, on
the other hand, is the time horizon over which factors of production are fixed, except for labor,
which remains variable.
Theory of cost and market structures
Neo-classical theory of the firm distinguishes a number of market structures, each with its own
characteristics and assumptions. The structure of a market refers to the number of firms in
the market, their market shares, and other features which affect the level of competition in
the market.
Pure Competition
Pure or perfect competition is a theoretical market structure in which the following criteria are
met: all firms sell an identical product Perfect competition is a benchmark, or 'ideal type', to which
real-life market structures can be compared.
Monopolistic Competition
is much like pure competition in that there are many suppliers and the barriers to entry are low.
However, the suppliers try to achieve some price advantages by differentiating their products from
other similar products. Monopolistic competition is only possible, however, that they are
significant by using advertising or other methods that would convince consumers of a product's
superiority.
Oligopoly
is a market dominated by a few suppliers. Although supply and demand influences all markets,
prices and output by an oligopoly are also based on strategic decicions. A high barrier to entry
limits the number of suppliers that can compete in the market, so the oligopolistic firms have
considerable influence over the market price of their product.
Monopoly
has pricing power within the market. There is only one supplier who has significant market power
and determines the price of its product. A pure monopoly faces little competition because of high
barriers to entry, such as high initial costs, or because the company has acquired significant market
influence through network effects, such as Facebook, for instance.