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Chapter 3 - Theory of Production
Chapter 3 - Theory of Production
THEORY OF
PRODUCTION
Diane L. Antonio
TOPIC OUTLINE:
3.1 Theory of Production
3.2 Inputs in Production
3.3 Stages of Production
3.4 Law of Diminishing Returns
3.1 THEORY OF PRODUCTION
Production is a process that create/adds value or utility.
It is the process in which the inputs are converted into outputs.
PRODUCTION FUNCTION
• Production Function means the functional relationship between inputs
and outputs in the process of production.
Q=f (K,L,etc.)
3.2 INPUTS IN PRODUCTION
LAND CAPITAL
LABOR ENTREPRENEUR
INPUTS: FIXED vs VARIABLE
FIXED INPUTS VARIABLE INPUTS
Remain the same in the short period In the long run all factors of production
varies according to the volume of outputs.
The cost of these inputs are called: Fixed The cost of these inputs are called: Variable
Costs Costs
0 10 -
Short run production function with Labor as Variable
1 10 10 10 10
2 10 30 20 15
3 10 60 30 20
4 10 80 20 20
5 10 95 15 19
6 10 108 13 18
7 10 112 4 16
input
8 10 112 0 14
9 10 108 -4 12
10 10 106 -2 10
Marginal Product Average
Labor (L) Capital (K) Total Product (TP)
(MP) Product (AP)
0 10 -
Short run production function with Labor as Variable
1 10 10 10 10
2 10 30 20 15 1st
Stage
3 10 60 30 20
4 10 80 20 20
5 10 95 15 19
6 10 108 13 18
2nd
7 10 112 4 16 Stage
input
8 10 112 0 14
9 10 108 -4 12 3rd
Stage
10 10 106 -2 10
3.3 STAGES OF PRODUCTION
First stage: Increasing return
● TP increase at increasing rate till the end of the stage
● AP also increase and reaches at highest point at the end of
the stage.
● MP also increase as it become equal to AP at the end of the
stage.
● MP > AP
MEANING: The firm is not making the best possible use of the fixed factor
Stage III: MP is negative implies contribution of additional labor is negative so the total output decreases.
Stage II: MP is below AP implies increase in input increases output in lesser proportion.
But where exactly the firm will operate within stage II cannot be determined only on the basis of the product curves.
LAW OF RETURNS TO SCALES :LONG RUN PRODUCTION FUNCTION
The long run is a period of time in which all factors of production and costs are variable.
1 100 100
2 250 150
3 425 175
4 550 125
5 600 50
6 525 -75
THANK YOU FOR LISTENING!
REFERENCES:
● https://www.economicsdiscussion.net/production-function/the-theory-of-production-function-concept-and-importance/16834
● https://www.britannica.com/topic/diminishing-returns
● https://www.investopedia.com/terms/l/lawofdiminishingmarginalreturn.asp
● http://uir.unisa.ac.za/bitstream/handle/10500/19514/Van_Reenen__MJ__0869815806__Section2.pdf?sequence=3&isAllowed=y
● https://www.vedantu.com/commerce/total-product-average-product-and-marginal-product#:~:text=Average%20Product%20(AP)%
3D%20Total,TP
)%2F%20Labour%20(L).&text=It%20denotes%20the%20addition%20of,of%20additional%20worker%20or%20input.