Professional Documents
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PRODUCTION
Concept of Production
Production
creation of goods or service for the purpose of selling
to buyers.
Creation of outputs by business firms, by government
agencies and by nonprofit institutions like school and
hospitals.
Examples of Production Activities
The farmer producing vegetables
The psychiatrist producing specialized service
The songwriter producing new song
The DPWH producing roads
A mother producing meals for her children
Suzuki Corp, producing motorcycles
Transforming Inputs to Outputs
Production is an activity where inputs are
transformed into outputs. To be able to do it, the
following are required
Assembling the necessary inputs
Transforming the inputs through a recipe and
technological process into outputs of goods and
services
What are the INPUTS
Capital - including raw materials ingredient,
supplies, tools, machinery, equipment and physical
facilities.
Labor – which combines and process the various
materials
Land - where the space allotted for processing is
located
Entrepreneurial or Managerial talent – which
performs function like supervision, planning,
control, coordination and leadership
Categories of Production Activities
Unique- product production
This type of production activity has as its output
“made to order” products and services.
High demands on skill and craftsmanship
Low volume of production is not uncommon but high
volume can be achieve by increasing the size of the
workforce.
Rigid Mass Production
This production activity involves the manufacture of
uniform products in large quantity using a well define,
proven and usually inflexible technology.
The tools, materials and parts used are standardized
which make movements and outcomes highly
economical.
This makes possible mass production in short periods
of time.
Flexible Mass Production
In this type of production activity, processing is done
in two stages.
The first stage involves mass production of standardized
components
Components are assembled into final products that appear
different from one another.
This type of production clearly has cost efficiency
advantage in addition to its ability to cater to consumer
needs.
Process or Flow Production
A continuous flow of output is the feature of process or
flow production
Integrated technology is employed to move a
continuous flow of raw materials inputs through the
system.
This production activity is highly automated and
mechanized, resulting to high production efficiency
when operated at capacity
Production Function
Relationship between the amount of inputs required and
the amount of output that can be obtained.
A schedule ( a table or mathematical equation) showing
the maximum amount of outputs that can produced from
any specified sets of inputs given the existing technology.
Example: the number of college graduate a school can
produce. School administrators know that the
quantity and quality of college graduate will depend
on the quality and quantity of teachers and students;
number and types of buildings, library and
laboratory facilities.
Marginal Product
Influences this trend and is define as the product due to
the additional or last unit of the variable resource input
and measured as follows
MP = ∆Q
∆I
Where: MP = marginal product or output
Qp = Total Product or Output
I = Resource Input
∆ = change
Production Function Table
Labor Total Product/ Marginal Average
(Manhours) Output Product Product
(Units) (Units)
1 5 5 5 Stage 1
2 10 5 5 Stage 1
3 16 6 5.3 Stage 1
4 21 5 5.2 Stage 2
5 24 3 4.5 Stage 2
6 24 0 4 Stage 2
7 21 -3 3 Stage 3
8 16 -5 2 Stage 3
9 10 -6 1.1 Stage 3
10 5 -5 0.5 Stage 4
11 2 -3 0.2 Stage 4
At Stage 1, every additional input of labor churns out a
bigger chunk with a higher Marginal Product (MP) to
accelerate (TP)
At Stage 2, additional inputs churns out a smaller chunk
with lower MP to still increase but decelerate TP. MP
continues to decline to negative levels
At Stage 3, where additional labor inputs has negative
returns and decrease T
Average Product is output per unit of the variable resource
input and measure as follows
AP = Q/I
* The decline in TP at last stage obviously decrease AP but
only to the level of zero
Law of Diminishing Returns
The production function shows that stretching the use
of variable resources against the limits of fixed
resources decreases additional product (MP)
Having too much of one resources and too little of
another can even result in a resources imbalance that
decreases production capacity with a negative MP at
stage 3
Stretching resource use to the point of imbalance or
overusing breeds counterproductive conditions which
directly cause diminishing or even negative returns.
Lessons of Diminishing Returns
The size of a resource, given the rest as fixed,
should not go beyond its product maximizing point.
Plant capacity can only increase with more
resources combined unless technology changes.
Resources are complementary, a resource is as
indispensable as any other in production.
Isoquant – Isocost Model
This model illustrates more dynamically how
different plant sizes and resource combinations
determine different levels of resource efficiency
and plant capacity.
ISOQUANT – combinations of resource input that
produce the same level of output.
ISOQUANT
Labor Input Capital Input Marginal Rate of
Substitution
1 30 -
2 26 4
3 22.5 3.5
4 19.5 3
5 17 2.5
6 15 2
7 13.5 1.5
8 12.5 1
9 12 0.5
10 12 0
ISOQUANT Figure
This figure shows inverse
relationship exists between the
resources as the capacity
foregone by using less of one is
regained by using more of the
other .