Production Theory

Introduction
Production is considered as one of the most essential topics that all firms considered in order to
increase their profitability and survive in a market that is characterized with fierce competition
and survival to the best firm who can produce and satisfy people wants and need

In order to discuss the topic the paper will focus on defining what is meant by production theory
and how people react to it in the term of variables that construct the production equation in order
to increase their productivity and the three stages of production

What is Production?
Production can be defined as an activity of transformation of input in order to obtain output this
can take different forms like

- Using raw materials in order to obtain finished goods

- Using intermediate good or in other words semi-finished goods to obtain finished goods

And from that we can conclude that the main variable of production is input which include
different factors that play an important part in the production process these input are classified as

- Raw materials
- Land
- Labor
- Capital
- Time

These factors of production is used by the entrepreneur who managed all that in order to seek
certain output (tribute, 2016)
Production Stages
The Production of any firms passes through three stages each stage has its own characteristics
and it can be summarized in the following:

Stage I: Increasing Returns

In this stage which is shown in the figure above it start from the origin going right till it reach the
point E in this stage it is characterized by increasing return because of many reasons like the
Fixed factors like the land are larger than the variable factors like workers this assumption give
the opportunity to the firm to employ more and more workers which will result in increasing
productivity till we reach the point E where the Marginal Production reach its maximum while
the Average Production is still increasing (Vijay , 2014)

Stage II: Diminishing Returns

In this Stage which is shown in the figure above from the Point E till it reach Point F in this stage
it begin from the intersection of Marginal production and the Average Production which reach its
maximum at this point here the law of diminishing begin to occur as I increase the factor of
production this will not lead to increase in production but on the opposite the production will
begin to decrease (Vijay , 2014)

Stage III: Negative Production

In this stage there is no production (Vijay , 2014)

Production Function

Production Function is the mathematical representation of the relationship between Input and
output and we have three production function that can express that according to the degree of
substitution of one input by the other ( Nitisha , 2014)

1- Cobb-Douglas Production Function

This function refer to the substitution of one of the physical input with one another but
here the substitution is limited and can be expressed by the linear equation
Q = AKaLb
Where A is a positive constant
And a , b are fractions
2- Leontief Production function
This function assume that all input are used in proportion and there is no substitute
between them it can be expressed by the following equation
q= min (z1/a, Z2/b)
Where Q is the quantity Produced
Z1 andZ2 are the quantity used of input 1 and 2
A and b are constants
3- CES Production Function
And this function is used for elasticity substitution and can be expressed by the following
equation
Q = A [aKβ + (1-a) L-β]-1/β
Reference

- Tribute Mishra , “managerial economics: Theory of Production “ 2016

http://nptel.ac.in/courses/110101005/downloads/Lecture%2017.pdf
- Vijay M. Shekhat “ Theory of Production “ 2014
http://elibrary.vssdcollege.ac.in/web/data/books-com-sc/mcom-pre/theory%20of
%20production.pdf
- Nitisha “ production function “ 2014
http://www.economicsdiscussion.net/production/3-types-of-production-functions-
explained/3659