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MANAGERIAL ECONOMICS
E 501
PRODUCTION AND BUSINESS ORGANIZATION
- Dr. Toufic A. Choudhury
1.

Production : It is the process of using the services of inputs to make goods and
services available.

2.

Inputs: The land, labour, capital, natural resources and entrepreneurship that are
combined to produce products and services.

3.

Production Function: Describes the relationship between any combination of input

services and the maximum attainable output from that combination.

4.

Short Run: A period of production during which some inputs cannot be varied.

5.

Variable Input: An input whose quantity can be changed.

6.

Fixed Input: An input whose quantity cannot be changed over the short run.

7.

Long Run: A period of production long enough that producers have adequate time to
vary all the inputs used to produce a good.

8.

Concern of the Theory of Production: The theory of production is the study of the
production function. The production function of a firm can be studied by holding the
quantities of some factors fixed, while varying the amount of other factors. This is
done when the law of variable proportions is derived. The production function of a
firm can also be studied by varying the amounts of all factors. The behaviour of
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production when all factors are varied is the subject matter of the laws of returns to
scale. Thus, in the theory of production, the study of (a) the law of variable
proportions and (b) the laws of returns to scale is included. Besides this, in the
theory of production we also explain which combination of inputs (or factors of
production) a firm will choose so as to minimize its costs of production.
9.

Law of Diminishing Marginal Returns: It states that the extra production obtained
from increase in a variable input will eventually decline as more of the variable input
is used together with the fixed inputs.

10.

Law of variable Proportions: TP, MP, and AP:

Total Product: Describes how output varies in the short run as more of any one input
is used together with fixed amounts of other inputs under current technology.
The amount of output produced over any given period when that input is used along
with other fixed inputs.
Marginal Product: The increase in output from one more unit of an input when the
quantity of all other inputs is unchanged. Thus, MP = TP/ L (L is input)
Average Product: The total output produced over a given period divided by the
number of units of that input. Thus, AP = TP/L

11.

Returns of Scale: The RTS reflect the responsiveness of TP when all the inputs are
increased proportionately. Three important cases should be distinguished:
Constant returns to scale denote a case where a change in all inputs leads to a
proportional change in output.
Decreasing returns to scale occur when a balanced increase of all inputs leads to a
less-than-proportional increase in total output.
Increasing returns to scale arise when an increase in all inputs leads to a more-thanproportional increase in the level of output.
Production shows increasing, decreasing, or constant returns to scale when a balanced
increase in all inputs leads to a more-than-proportional, a less-than-proportional, or a
just-proportional increase in output.

12.

Productivity is a concept measuring the ratio of total output to inputs.

13.

Business Organizations: Production is organized in firms because efficiency

generally requires large-scale production, the raising of significant financial resources,
and careful management and monitoring of ongoing activities.

14.

Forms of Business Organizations: Production in a market economy takes place in a

variety of BO. At one end of the spectrum are the individual proprietorships, the
classic small business often called Mom and Pop stores. Often a business requires a
combinations of talents.

Any two or more people can get together and form a

Partnership. Each agrees to provide some fraction of capital, to share profits and also
losses. The bulk of the economic activity in an advanced market economy takes place
in corporations. A corporation is a form of BO, chartered domestically or abroad and
owned by a number of individual shareholders. The Corporation has a separate legal
identity, and indeed is a legal person that may on its own behalf buy, sell, borrow
money, produce goods and services, and enter into contracts. In addition, the
corporation enjoys the right of limited liability, whereby each owners investment in
the corporation is strictly limited to a specified amount.
FOR DETAILS, PLEASE STUDY THE REFERENCE BOOKS.