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Theory of Production

This document discusses production theory and how producers make decisions in a market. It explains key concepts like production technology, cost constraints, input choices, factors of production, outputs, and profit maximization. The law of diminishing marginal returns and production functions are also covered. Short run and long run adjustments are distinguished, with the short run having at least one fixed input and the long run allowing all inputs to be variable.

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Kyla Dunton
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86 views2 pages

Theory of Production

This document discusses production theory and how producers make decisions in a market. It explains key concepts like production technology, cost constraints, input choices, factors of production, outputs, and profit maximization. The law of diminishing marginal returns and production functions are also covered. Short run and long run adjustments are distinguished, with the short run having at least one fixed input and the long run allowing all inputs to be variable.

Uploaded by

Kyla Dunton
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Production Theory – how producers behave in a market

*Producer’s role in the market includes not only selling the products but also producing them

*Production decisions of firms can be understood in these steps:

1. Production Technology/Methodology – how inputs can be transformed into outputs

2. Cost Constraints – determining production expenditures or prices of labor, capital and other inputs

3. Input Choices – firm chooses how much of each input to be used in production

Production – resources are transformed into goods and services that have considerable value to
consumers

Factors of Production: land, labor, capital, entrepreneurship

Inputs – resources used for production

Output – finished product

*Producers in the market seek for profit maximization, maximize the revenue but minimize the costs of
production

Law of Diminishing Marginal Returns – states that as more and more inputs are added to production
while holding other inputs fixed, the additional outputs start to diminish at a certain point.

*As the use of an input increases with other inputs fixed, the resulting additions to output will
eventually decrease.

*For instance, when the labor input is small (and capital is fixed), extra labor adds considerably to
output, often because workers are allowed to devote themselves to specialized tasks. Eventually,
however, the law of diminishing marginal returns applies when there are too many workers, some
workers become ineffective and the marginal product of labor falls.

Production Function – refers to the greatest output that can be created given an exact number of inputs

Q = f (land, labor, capital)

Wherein, Q is output, land may also refer to raw materials, labor which is manpower resource and
capital which includes equipment, machinery and other capital goods.

Short Run and Long Run Adjustments:

*It takes time for a firm to adjust its inputs to produce its product with differing amounts of labor and
capital. A new factory must be planned and built, and machinery and other capital equipment must be
ordered and delivered. Such activities can easily take a year or more to complete.

*As a result, if we are looking at production decisions over a short period of time, such as a month or
two, the firm is unlikely to be able to substitute very much capital for labor. Because firms must consider
whether or not inputs can be varied, and if they can, over what period of time, it is important to
distinguish between the short and long run when analyzing production.
Short run – refers to a period of time in which the quantities of one or more factors of production
cannot be changed.

*In other words, in the short run, there is at least one factor that cannot be varied; such a factor is called
fixed input.

Long run – the amount of time needed to make all inputs variable

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