1. Explain the Theory of Production in Microeconomics.

Answer: In economics, production theory explains the principles in which the business has to
take decisions on how much of each commodity it sells and how much it produces, and also how
much of raw material ie., 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.
2. Differentiate labor-intensive and capital-intensive technology.
• Capital intensive production requires more machinery, equipment, and sophisticated
technological production systems in the production process. Capital intensive production
requires a higher level of investment and a larger amount of funds and financial resources. A
capital-intensive production process is mostly automated and able to generate a large output of
goods and services. Since capital-intensive production relies largely on machinery and
equipment, such industries require long-term investment, with a high cost involved in
maintaining and depreciating equipment. In such a capital-intensive production process, it could
be very costly to increase output levels as this would require higher investment in such
machinery and equipment.
• Labor intensive is where most of the production is carried by workers or employees. It means
that the levels of output would be at a much smaller scale than in a labor-intensive industry. The
costs involved in a labor-intensive production unit would be the costs of training and educating
employees. However, in comparison to capital intensive, in labor-intensive production,
increasing the volume of output is easier as it does not require a large investment. Instead, hiring
more workers, asking workers to work extra hours, and hiring temporary staff can increase
production in the short term.

• Capital intensive and labor-intensive refer to types of production methods followed in the
production of goods and services.
• Capital intensive production requires more equipment and machinery to produce goods;
therefore, requires a larger financial investment.

• Labor intensive refers to production that requires a higher labor input to carry out production
activities in comparison to the amount of capital required.

3. Illustrate and discuss the 3 Stages of Production: Increasing Returns, Diminishing

Returns, and Negative Returns. 
Increasing Returns:
The law of increasing returns generally applies to manufacturing industries. Here man is not
hampered by nature. He goes ahead and benefits from all sorts of economies, both internal and
external. We have already discussed the economies of large-scale production. They are all
available to a big manufacturer. As he increases the scale, production becomes more and more
economical. The cost of production falls, which means an increasing return. Initially, adding to
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.
Diminishing Returns:
The principle states that a decrease in the output range can be observed if a single input is
increased over time. The word ‘diminishing’ suggests a reduction, and this reduction takes place
due to the manner in which goods are produced. This concept is vital in economics as well as
other fields of business and finance, to predict a range of outputs and their causal factors. It
primarily holds true in all kinds of production, of course, but may change if the production
method varies. 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. This process culminates with the product reaching its maximum value, meaning
that the marginal product becomes zero. Optimum production is set somewhere within this stage.
Adding more units of the variable factor after this point will lead to the overall output starting to
diminish.
Negative Returns
Excessively adding to the variable input after the point of optimum production will eventually
lead not only to a decrease in efficiency but even to a negative return of production. The excess
in the variable factor now hurts the whole production process. Clearly, every investor wants to
avoid negative returns. In some cases, negative returns on certain investments create tax
deductions or reductions, but from a cash perspective a negative return means outflows exceed
inflows either immediately or over time.
Resources:
https://www.tutorialspoint.com/managerial_economics/theory_of_production.htm
https://www.differencebetween.com/difference-between-labour-intensive-and-vs-capital-
intensive/
https://www.indeed.com/career-advice/career-development/law-of-diminishing-marginal-returns