BUS 525: Managerial Economics

THE THEORY OF PRODUCTION

Sakib Bin Amin, Ph.D.

Associate Professor, School of Business and Economics
Director, NSU Accreditation Project Team (APT)
North South University
 The Theory of Production

 The production function shows the maximum amount of

output that can be produced with a given amount of input
when the best production techniques available are used.

 In other words, the production function specifies the

maximum output that can be produced with a given quantity
of inputs. It is defined for a given state of emerging and
technical knowledge.
The Theory of Production
 The Theory of Production

Total Product: Total product of a factor is the amount of total

output produced by a given amount of the factor, while other
factors held constant. Total product designates the total amount
of output produced.
 The Theory of Production

Units of Labor Total Product Marginal Product Average Product

1 80 80 80

2 170 90 85

3 270 100 90

4 368 98 92

5 430 62 86

6 480 50 80

7 504 24 72

8 504 0 63

9 495 -9 55

10 480 -15 48
 The Theory of Production

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The Theory of Production
 The Theory of Production

Law of Diminishing Return: The law of diminishing return

holds that we will get less and less extra output when we add
additional amount of an input while holding other inputs
fixed/the marginal product of each output will decline as the
amount of that input increases holding all other input constant
 The Theory of Production

Relationship between TP and MP:

1.When TP is increasing, MP is always positive
2. When TP reaches its maximum point, MP is zero at that point
3.When TP is decreasing, MP is negative

Relationship between MP and AP:

1.When AP is increasing, MP lies above AP
2.When AP is decreasing, MP lies below AP
3.MP intersects AP at its maximum point
 The Theory of Production

Sakib B. Amin, Ph.D., Associate Professor, SBE, NSU.

 The Theory of Production

Returns to Scale: It shows the percentage change in output

due to percentage change in input./The relationship between a
proportional change in inputs to a productive process and the
resulting proportional change in output.
 The Theory of Production
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