Production Theory micecon

8/7/2019 Production Theory micecon

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PRODUCTION

THEORY



Production- refers to the economic process of

converting of inputs into outputs. Productionuses resources to create a good or service that issuitable for exchange. This caninclude manufacturing, storing, shipping,and packaging. Some economists defineproduction broadly as all economic activity other than consumption. They see every commercial

activity other than the final purchase as someform of production



Production is a process, and as such it occursthrough time and space. Because it is a flowconcept, production is measured as a ´rate of

output per period of timeµ. There are threeaspects to production processes:

1.the quantity of the good or service produced,

2.the form of the good or service created,3.the temporal and spatial distribution of the good

or service produced.

Firm/ Seller/ Producer- Deciding about the input combination to

profit maximization & cost minimization



P RODUCTION FUNCTION

- refers to the relationship between inputs that arerequired and outputs that are obtained

Input - refers to the different ingredients used to produce

goods and servicesOutputs ² refers to the goods and services that result fromthe production processA production function can be expressed in functional formas the right side of:

Q = f (X 1,X 2,X 3,..., X n)where: Q = quantity of output X 1,X 2,X 3,..., X n = quantities of

factor inputs (such as capital, labour, land or rawmaterials).



Production Function-specifies the units of output that can be

produced from a given set of inputs. (H ow manyunits of inputs must be combined to produce somuch of an output)

- it summarizes the characteristics of

existing technology at a given point in time; itshows the technological constraints that a firmmust reckon with.

- shows the most output that existingtechnology permits the firm to extract from eachquantity of inputs.



TYPES OF INPUTS

Fixed Input ² is one whose quantity cannotchange during the period of time underconsideration.

(ex: plant & equipment, factory, office, building,machinery, and transportation facilities)

Variable inputs ² is one whose quantity can be

change during the relevant period.(ex: labor)



P RODUCTION PERIODS

- the length of time which the firm can vary theamount of productions input to be used.

Immediate period- the time is too short for the firmto vary the quantity of is inputs.



TH E S H ORT RUN AND LONG RUN

Short Run ² defined as the period of time inwhich at least one of the firm·s inputs is fixed(cannot be changed)

- generally understood to mean thelength of time during which the firm·s plant andequipment are fixed.

Long Run ² is that period of time in which all

inputs are variable.- all resources can be shifted from oneform of production into another

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Production Theory micecon