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Introduction
Production Theory
is concerned with finding the most
efficient combination of inputs to
use to produce the goods and
services subject to specific
constraints.

Production refers to the transformation of inputs

into goods and services.
Inputs refer to resources used to produce
another
commodity. They usually include
labor, capital, and land.
Variable inputs refer to input that can be
changed over a
short period of time.
Fixed inputs are inputs that cannot be changed
or
extremely expensive to change over a short
period of time.

Inputs

Fixed Input

Variable Input

Outputs are the goods or services

produced which may either be in the
form of an intermediary goods and final
goods.
Intermediate goods refer to products
used as input goods; also called as capital /
producers / investment goods that are
used in production of other goods.
Final goods are products used in
consumption; Consumer goods.

Production Function refers to an equation,

table, or graph showing the productivity of a
firm using a specific amount of fixed and
variable inputs for a period of time.
Equation Form:
Q = f ( L, K )
In other words, production depends on the number
of laborers and the amount of capital equipment
used.

Table Form:

Characteristics:
a.

The more inputs used, the greater the quantity of output produced.

b.

There are several possible combinations of inputs to produce a

specific amount of output.

Short Run and Long Run in Economics

In economic analysis the distinction between the short run and the
long run:
It is not related to any particular measurement of time (e.g.
days, months, or years).
It refers to the extent to wc a firm can vary the amounts of the
inputs in its production process

Short run production function

Shows the maximum quantity of a good / services that can
be produced by a set of inputs, assuming that the amount
of at least one of the input used remains unchanged.
Long run production function
Shows the maximum quantity of a good / services that can
be produced by a set of inputs, assuming that the firm is
free to vary the amount of all inputs being used.

Production Function with one Variable Input

In the short run, firms do not have much time to change

quantity of all inputs quickly and cheaply. Thus, production
managers have at least one fixed input.
Example:
A manufacturing firm needs two types of economic
resources (Inputs) in producing a particular product
(Output). Also, suppose that the two economic resources
are a fixed input in the form of capital (K), and labor (L) as
variable input. Since capital (K) is fixed, then K is not
changed although output changes. For this reason, output
is now solely dependent on labor (L) in the short run.
Therefore, the production equation is revised as follows:
Q = f ( L, K ) Q = f ( L )

Production Function with one Variable

Input
The table below shows the relationship of labor as a
variable input to total output produced, as well as the
corresponding marginal product, and average product.

MP shows the additional units produced for every unit of variable input (L) being added or is the contribution of each additional laborer used in the production.
MP = (change in Q / change in L).
AP represents the average unit produced by each laborer given the different levels of variable input. In other words, it represents the productivity of each worker on average.
AP = ( Q / L).

Production Function with one variable

input

Phenomenon !!!
Stage 1

Stage 2
Stage 3

Law of
Diminishing
Returns

Stage 1: Increasing Returns

In economic theory, each worker is equally productive. Thus, the effect of teamwork and specialization enables
additional workers to contribute more than those added previously to the production process.
This results because the working condition become more efficient / improves as workers help each other.

Production Function with one variable

input

Phenomenon !!!
Stage 1

MP = AP
Stage 2
Stage 3

Law of
Diminishing
Returns

Stage 2: Law of Diminishing Marginal Returns

The point where MP starts to decrease ( MP = AP), as additional worker

add less to productivity. This is caused by the declining opportunities for
increasing return through specialization and teamwork.
Stage 3: Negative Marginal Returns
The point where TP starts to decrease. Eventually, there may be so many workers
relative to the fixed capacity that they may start to interfere with each other. In
other words, each additional workers only hampers production.

Stages of Production

TP

AP

MP