Production

Theory
 Introduction
Production is the process of converting inputs
into outputs which can be used by the ultimate
user.
purpose of production is to satisfy customers’

wants.
objective is to maximize profits
 Production period

 Shortrun
 Long run
What is the Short Run?
A period of time so
short that there is at
least one fixed input

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What is the Long Run?
• A period of time so long
that all inputs are
variable
• There is no fixed input

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What is a Fixed Input?
Any resource for which the
quantity cannot change during
the period of time under
consideration
Examples: machines, office
buildings, restaurants, and
tools & equipment.
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What is a Variable Input?
Any resource for which the
quantity can change during the
period of time under
consideration
Examples: labor, raw materials,
electricity, water
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 What is the
Production Function?
The relationship
between the maximum
amounts of outputs a
firm can produce and
various quantities of
inputs 8
 What is short-run
production?
Short-run production refers to
production that can be completed
given the fact that at least one factor
of production is fixed.
 What is
Total Product?

Quantity of output produced

from a given amount of
inputs
 What is
Average Product?

Quantity of output per

worker (TP/QL)
 What is
Marginal Product?
The change in total output produced by adding
one unit of a variable input, with all other inputs
used held constant

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Quantity Total Marginal Average
Labor Product Product Product
0 0 - -
1 40 40 40.00
2 100 60 50.00
3 140 40 46.67
4 170 30 42.50
5 190 20 38.00
6 200 10 33.33
7 200 0 28.57
8 190 -10 23.75
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 What is the Law of
Diminishing Returns?
The principle that beyond
some point the marginal
product decreases as
additional units of a variable
resource are added to a
fixed factor 15
Stages of production
Stage I
 Starts from origin until MP & AP curves

intersect
 TP increases at an increasing rate, MP and

AP reach maximum
 Law of increasing returns
 Output level is still low compared to plant

capacity
 Production is inefficient
 Stages of production (Cont.)
Stage II
 Starts from MP = AP until MP = 0 or TP = max
 TP increases at a decreasing rate
 MP and AP falling
 Law of decreasing returns
 Most efficient stage since all inputs are efficiently used

Stage III
 Inefficient stage
 Additional labor reduces TP
 MP is negative and AP approaching the qty axis
 Output is too big - machine, plant size cannot cope with
increasing variable inputs
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