production theory
TRANSCRIPT
PRODUCTION
THEORY
production
resources
used
goods or
services that
are produced
Factor of Production
Production Terminologies
FIRMS INDUSTRIES TIME PERIOD
Organization or
production units that
own and use limited
FOP to produce goods
and services
A number of firms that
operate in the same
market and produce
the same types of
goods
The duration of
production
Maximize profit Short run – at least one
fixed input and one
variable input
Long run – all the
inputs are variable
Production Concept
• Total quantity of output produce with a given quantity of input.
• Total Product = Average Product x Total Variable Input
Total Product (TP)
• Ratio of total production to total variable inputs (labour) used to produce a product.
• Average Product = Total Product / Total Variable Input
Average Product (AP)
• The change in total production when variable inputs are increased in increments of one unit.
• Marginal product = change in TP / change in Total Variable Input
Marginal Product (MP)
TP = AP x TL AP = TP /TL MP = ∆TP / ∆ TL
Capital Labour TP AP MP
10 0 0
10 1 8
10 2 20
10 3 33
10 4 44
10 5 50
10 6 54
10 7 56
10 8 56
10 9 54
10 10 50
Fill in the blank table and plot TP, AP
and MP in graph paper
Answer
Capital Labour TP AP MP
10 0 0 - -
10 1 8 8 8
10 2 20 10 12
10 3 33 11 13
10 4 44 11 11
10 5 50 10 6
10 6 54 9 4
10 7 56 8 2
10 8 56 7 0
10 9 54 6 -2
10 10 50 5 -4
-10
0
10
20
30
40
50
60
1 2 3 4 5 6 7 8 9 10 11
Capital
Labour
TP
AP
MP
Stages of Production
Stage 1
Stage 2
Stage 3
Stage 1 Stage 2 Stage 3
Labour
TP/AP/MP
Stages of
production
TP MP AP
1
(increasing
returns)
• Increases at an
increasing rate
• Increases at a
decreasing rate
• Increases
• Reaches
maximum and
begins to
diminish
• Increases
• Continues to
increase
2
(diminishing
returns)
• Increases at a
decreasing rate
• Reaches maximum
• Continues to
diminish
• Becomes zero
• Reaches
maximum and
begins to
diminish
• Continues to
diminish
3
(negative
returns)
• Diminishes • Becomes
negative
Continues to
diminish
A rational producer will always choose to
produce at stage 2 – is the most efficient stage of
production as the combinations of inputs are fully
utilized
Relationship between TP and MP
• When MP is increasing, TP will
increase at an increasing rate
• When MP is decreasing, TP will
increase at a decreasing rate
• When MP is zero, TP is at its
maximum
• When MP is negative, TP declines
Relationship between MP and AP
• When MP is above AP, AP is
increasing
• When MP is below AP, AP is
decreasing
• When MP equals AP, AP is at its
maximum
Law of diminishing marginal returns states that as more of a variable inputs is
used, with other tachnology and input remaining fixed, the marginal product of the
variable input will eventually decline.
