Production Theory

Managerial Economics – Peterson, Lewis, Jain

4th Edition, Pearson Publication
 Production theory basics
 Production refers to the economic process of
converting of inputs into outputs.
 Production uses resources to create a goods or
service that is suitable for exchange.
 This can include manufacturing, storing,
shipping, and packaging.

 Factors of production
 Raw materials
 Machinery
 Labour services
 Capital goods
 Land
 Total, Average, and Marginal
product
 Total Product Curve
 The total product (or total physical product) of
a variable factor of production identifies what
outputs are possible using various levels of
the variable input.
 This can be displayed in either a chart that lists
the output level corresponding to various
levels of input, or a graph that summarizes
the data into a “total product curve”.

Total, Average, and Marginal product


Total Product Curve
 Total, Average, and Marginal
product
 The diagram shows a typical total product
curve.
 In this example, output increases as more
inputs are employed up until point A.
 The maximum output possible with this
production process is Qm. (If there are other
inputs used in the process, they are assumed
to be fixed.)


Total, Average, and Marginal
product
 The average physical product is the total
production divided by the number of units of
variable input employed. It is the output of
each unit of input.
 If there are 10 employees working on a
production process that manufactures 50
units per day, then the average product of
variable labour input is 5 units per day.

 verage and Marginal Product Curve
To t a l, Av e ra g e , a n d Ma rg in a l
p ro d u c t
 Total, Average, and Marginal
product
 The average product typically varies as more of the
input is employed, so this relationship can also be
expressed as a chart or as a graph.
 The marginal physical product of a variable input is
the change in total output due to a one unit
change in the variable input (called the discrete
marginal product) or
 Alternatively the rate of change in total output due
to an infinitesimally small change in the variable
input (called the continuous marginal product).

 Additional information and Calculus