Chapter 8 Production Theory Learning Journal

Name: Romeo Bordallo Jr.

Subject: Microeconomic Analysis
Professor: Maria Corazon E. Mercado, DBA.

In production theory, we learn the principles in which the business has to take decisions
on how much of each commodity it sells, how much it produces, how much of raw material i.e.
fixed capital and labor it employs, and how much it will use. It defines the relationships
between the prices of the commodities and productive factors on one hand and the quantities
of these commodities and productive factors that are produced on the other hand.
I have learnt the transformation phase in the production process that a product or
service has to undergone in respect to inputs used in the production process. These inputs are
called factors of production like raw materials, labor, machinery, land and capital goods.
I have also learnt the difference of short run and long run production short run is about
the variable factors incurred in the production process and have at least one fixed factor in
other words short run is partly variable and partly fixed. On the other hand long run production
refers to a period where all factors of productions are variable.
It was also discussed in this report about the law of diminishing returns it was stated
that the law of diminishing returns in any production process, a point would be reached where
adding one more production unit while keeping the others constant will cause the overall
output to decrease.
As a student of economics, it is very important to be aware of the three stages of
diminishing returns for us to know when problem arises in the production process. The first
stage is the increasing returns; initially adding one production variable is likely to improve the
output as the fixed inputs are in abundance compared to the variable one. Therefore, adding
more units of the variable factor will use the fixed factors more efficiently and increase
production. The second stage, diminishing returns as more units of the variable factor are
added, the overall production will continue to increase. However during this stage, the total
product increases at a continuously decreasing rate because the optimum production is already
reached at this stage so adding more units of the variable factor after this point will lead to the
overall output to diminish. Lastly the negative returns excessively adding variable input after
the point of optimum production will eventually lead not only to a decrease in efficiency but
even negative return of production. The excess in the variable factor now hurts the whole
production process.