AG ECON

ELLON JADE M. GALERA

EARL FUTALAN
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Production
Production is the process a firm uses to transform
inputs (labor, capital, raw materials, equipment) into
outputs, the goods (tangible) or services (intangible)
the firm wishes to sell.
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Production Theory in Economics

Refers to how businesses decide the quantities of
outputs to produce in response to demand.

The firm produces goods or commodities with limited

resources.

The resources firms use in production are called the

factors of production, or also known as inputs.
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Two Types of Inputs

Variable Input: are those that can easily be increased

or decreased in a short period of time.

Fixed Input: are those that can’t easily be increased

or decreased in a short period of time.
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The Isoquant Curve

An isoquant is a concave-shaped curve on a
graph that measures output, and the trade-off
between two factors needed to keep that output
constant. Among the properties of isoquants:

An isoquant slopes downward from left to right.

 The Isoquant Curve
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B
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The Isocost Line

An Isocost line is a curve which shows various

combinations of inputs that cost the same
total amount. For the two production inputs
labor and capital, with fixed unit costs of the
inputs, the isocost curve is a straight line.
 The Isocost Line
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B
 Economies of Scale
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Cost advantages reaped by companies when

production becomes efficient.

This happens because costs are spread over a

larger number of goods.

Costs can be both fixed and variable.

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Economies of Scale
Example:
When a farm delivers with its truck full of milled
rice to the market, then returns to the farm
carrying fertilizers for the next growing season.
The cost of labor, gasoline, time, and effort are
being distributed over a larger number of goods,
thus becoming more efficient.
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Theory of Production Function

-how the output will change when a variable
input changes

Production Function: Q = F (K,L)

Q – output (dependent)
F – function
K – capital
L – Labor
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Theory of Production Function

Example: The SU Farm can hire up to 12
farm workers to work on rice production
in a day.

Table 1 shows the production schedule of

the farm with each added farm worker.
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Theory of Production Function

 CRS
DR
S S
IR
REMEMBER!
Stage 1: IRS – Increasing Returns to Scale
Double input will result to more than doubled
output.

Stage 2: CRS – Constant Returns to Scale

1 change = 1 output
5 input = 5 output

Stage 3: DRS – Decreasing Returns to Scale

The total output decreases even there is an
increase in variable input.
The Law of Diminishing Returns
A theory in economics that predicts that after
some optimal level of capacity is reached,
adding an additional factor of production will
actually result in smaller increases in output.

WHY? Because of fixed Capital.

Fixed farm land area
Fixed size of the warehouse
1. When MP is higher than
AP, it means TP is high.
2. When MP crosses the
CRS
AP, productivity will DR
S S
decline.
IR
The Law of Diminishing Returns
Short Run Period
The short run is the period where only the
variable inputs can be changed. Usually, this
variable input is labor, and the fixed inputs are
usually capital and land.
The Law of Diminishing Returns
Short Run Period Example:
The SU farm can easily hire more workers in
this period, but things like machines and the
farm warehouse cannot be improved. This
means that any change in output must be a
result of a change in the variable input.
The Law of Diminishing Returns

Long Run Period

The opposite of the short run is the long run - a
period that is long enough, allowing for all
inputs to be changed.
The Law of Diminishing Returns
Long Run Period Example:
For instance, if a farm increases the number of
workers, the farm may be doing so well that it
will add more machines in the future or
purchase the neighboring land to increase the
capital as it can make more money this way.
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Learning Curve Theory

The more an employee practices something, the
better they become at it.

This translates to lower costs and higher output in

the long term.
 Learning Curve Theory

Example:
1. Farm Workers
TASK

2. Rice Harvesters

TIME
Conclusion

The only way to be proficient at

something is repetition.
TASK

Learning takes time, be patient with

yourself.

TIME