The Theory

of
Production

1
The Theory of Production
Production is the process of transforming
inputs of resources into outputs of goods
and services
Production function shows the maximum
quantity of the commodity that can be
produced per unit of time for each of a set
of alternative inputs, when the best
production techniques available are used.

2
The Theory of Production

Some Formula & Symbols

Output, Total Product, TP, Y, Q

Input, X, variable input
Average Product, AP
AP = TP ÷ X
Marginal Product, MP
∆TP ÷ ∆X
3
Production in the Short
Run: One variable input
Land Labor TPL APL MPL
1 0 0 0 ---
1 1 10 10 10
1 2 25 12.5 15
1 3 45 15 20
1 4 60 15 15
1 5 70 14 10
1 6 75 12.5 5
1 7 75 10.71 0
1 8 70 8.75 -5
4
Production in the Short Run:
One variable input

TP
TPL

APL

MPL L 5
Production in the Short Run:
One variable input

Stage I Stage II Stage III

TP
TPL

APL

MPL L 6
Production in the Short
Run: One variable input
Land Labor TPL APL MPL
1 0 0 0 ---
Stage 1
1 1 10 10 10
1 2 25 12.5 15
1 3 45 15 20
1 4 60 15 15
1 5 70 14 10 Stage II
1 6 75 12.5 5
1 7 75 10.71 0
Stage III
1 8 70 8.75 -5
7
Production in the Short Run:
Law of Diminishing Returns

…as the use of an input increases,

(together with other fixed inputs), a
point will eventually be reached at which
the resulting additions to output
decrease

…declining marginal product