The Theory of Production Relationship between factors of production and the output of goods and...
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The Theory of The Theory of Production Production Relationship between factors of Relationship between factors of production and the output of goods production and the output of goods and services and services How output changes when inputs change How output changes when inputs change Based on short run Based on short run Producers only change variable inputs Producers only change variable inputs Long run Long run Period long enough for all inputs to Period long enough for all inputs to vary vary
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Transcript of The Theory of Production Relationship between factors of production and the output of goods and...
The Theory of ProductionThe Theory of Production
Relationship between factors of Relationship between factors of production and the output of goods and production and the output of goods and servicesservices
How output changes when inputs changeHow output changes when inputs change
Based on short runBased on short run Producers only change variable inputsProducers only change variable inputs
Long runLong run Period long enough for all inputs to varyPeriod long enough for all inputs to vary
Law of Variable ProportionsLaw of Variable Proportions
Output will change as one input is Output will change as one input is variedvaried Other inputs are held constantOther inputs are held constant
ExamplesExamples Preparing chili and adding more chili Preparing chili and adding more chili
powderpowder Farming and using fertilizerFarming and using fertilizer ““too much of a good thing is a bad thing”too much of a good thing is a bad thing”
The Production FunctionThe Production Function
Illustrates the Illustrates the Law of Variable Law of Variable ProportionsProportions Variable inputs Variable inputs
horizontalhorizontal Total output Total output
verticalvertical
The Production FunctionThe Production Function
Total ProductTotal Product Total output Total output
produced by the produced by the firmfirm
Marginal ProductMarginal Product Extra output Extra output
generated by generated by adding one more adding one more unit of variable inputunit of variable input
Number of Workers
Total Product
Marginal Product
0 0 0
1 14 14
2 42 28
3 75 33
4 112 37
5 150 38
6 180 30
7 203 23
8 216 13
9 207 -9
10 190 -17
Three Stages of ProductionThree Stages of Production
Stage I: Increasing ReturnsStage I: Increasing Returns Each input contributes more than the previousEach input contributes more than the previous Total output rises at a faster rateTotal output rises at a faster rate
Stage II: Diminishing ReturnsStage II: Diminishing Returns Total production is growingTotal production is growing
But by smaller amountsBut by smaller amounts
Known as principle of diminishing returnsKnown as principle of diminishing returns
Stage III: Negative ReturnsStage III: Negative Returns Total production is decreasingTotal production is decreasing
Number of Workers Total Product Marginal Product
0 0 0
1 14 14
2 42 28
3 75 33
4 112 37
5 150 38
6 180 30
7 203 23
8 216 13
9 207 -9
10 190 -17
