The Production Theory

8/3/2019 The Production Theory

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THEPRODUCTION

THEORY


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PRODUCTION

Inputs Outputs

Conversion

Economic Process

Factors of Production Product


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TYPES OF INPUTS

Resources that are

used at a constant

amount in the

production of a

commodity

Resources that can

change in quantity

depending on the level

of output being

produced

FIXED INPUTS VARIABLE INPUTS


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PRODUCTION FUNCTION

Exemplifies the relationship between

Productions Outputs and Inputs

Refers to the physical relationship between the

inputs or resources of a firm and their output of

goods and services at a given period of time,

ceteris paribus.

Production (P) = Inputs (Ip)

P= f(Ip)

Ip = Fixed Inputs and Variable Inputs

P = f(Land, Labor, Capital)


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Production Variables

Total Product

Marginal

Product

AverageProduct

Output in a

time period

Productivity

Total outputper input used

-Additional

Product as a result of

additional input

- Change in Total Product


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Total Product (TP)output / total quantity of goods and

services produced within a specific period of time

Average Product (AP)

Marginal Productadditional product produced from using

additional unit of a variable input

n= new (current) , o = old (previous)

InputofQuantity

ctTotalProduAP

on TPTPMP


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Quantity ofLabor

TotalProduct of

Labor

AverageProduct of

Labor

MarginalProduct of

Labor

0 0 - -

1 10 10 10

2 30 15 20

3 60 20 30

4 80 20 205 95 19 15

6 108 18 13

7 112 16 4

8 112 14 0

9 108 12 -4

10 100 10 -8

Input

TPAP

on TPTPMP


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Quantity ofLabor

TotalProduct of

Labor

AverageProduct of

Labor

MarginalProduct of

Labor

0 0 - -

1 10 10 10

2 30 15 20

3 60 20 30

4 80 20 205 95 19 15

6 108 18 13

7 112 16 4

8 112 14 0

9 108 12 -4

10 100 10 -8

Input

TPAP

on TPTPMP


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-20

0

20

40

60

80

100

120

1 2 3 4 5 6 7 8 9 10

TP, AP, MP

Quantity of Labor

Used

Total Product

Marginal Product

AverageProduct


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-10

-5

0

5

10

15

20

25

30

35

2 6 12 20 26 30 32 32 30 26

Total product of labor (TPL)

Average product of labor(APL)

Marginal Product of Labor

TP, AP, MP

Quantity of Labor Used

Rises then Falls!


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-10

-5

0

5

10

15

20

25

30

35

2 6 12 20 26 30 32 32 30 26


Average product of labor (APL)


a

bc

d

TP, AP, MP

Quantity of Labor Usede


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KEY POINTS / RELATIONSHIPS IN THE

Total Product (TP), Average Product (AP), Marginal

Product MP)a : Total Product is at its peak

b : Marginal Product is at its peak or the Point of Diminishing Marginal Productivitylevel of

output at which marginal product reaches maximum

e : peek of AP (Maximum AP) or the Point of Diminishing Average ProductivityPeek of

AP which relates that up to that point, AP increasing but

beyond that point AP is decreasing

c : Point of Intersection between MP and APproductivity of input = incremental increase in output

d : MP = zero, the TP is at its peak or maximum


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-10

-5

0

5

10

15

20

25

30

35

2 6 12 20 26 30 32 32 30 26


Average product of labor (APL)


STAGE 1

STAGE 2

STAGE 3

TP, AP, MP

Quantity of Labor Used


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THREE STAGES OF PRODUCTION

In Stage I

APL is increasing so MP>AP.

All the product curves are increasing

Stage I stops whereAPL reaches its

maximum at pointA.

MP peaks and then declines at point C

and beyond, so the law of diminishingreturns begins to manifest at this

stage


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Stage II

starts where theAPL of the input beginsto decline.

TP still continues to increase, althoughat a decreasing rate, and in fact reachesa maximum

Marginal product is continuouslydeclining and reaches zero, as

additional labor inputs are employed.


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Stage III starts where the MPL has

turned negative.

all product curves are decreasing.

total output starts falling even as the

input is increased

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The Production Theory