THEORY OF

PRODUCTION
Basic Concept
MEANING OF PRODUCTION

• Production in economics generally refers to the

transformation of inputs into outputs.

THEORY OF PRODUCTION
• An analysis of input-output relationship in the
short-run as well as in the long run
 Production
INPUTS PROCESS OUTPUTS

Factors of Production Goods and Services

• Land – natural resources
• Labor – mental and physical
ability used in production.
• Capital – goods that are used in
the production of other goods
• Entrepreneurship – combines
land labor and capital
TECHNOLOGY: LABOR INTENSIVE OR CAPITAL
INTENSIVE

Labor Intensive Technology

• Utilizes more labor resources than capital resources.
• Usually employed by economies where labor resources are
abundant and cheap
TECHNOLOGY: LABOR INTENSIVE OR CAPITAL
INTENSIVE

Capital Intensive Technology

• Utilizes more capital resources than labor resources.
• Employed by industrialized economies since capital resources
in these economies are cheaper than labor.
 SHORT RUN versus LONG RUN
Fixed Input
• Remain constant regardless of the volume of production.
Variable Input
• Changes in accordance with the volume of production.
Short Run
• The use of at least one factor of production cannot be changed,
or there are fixed inputs.
Long Run
• All factors can be changed or all inputs are variable.