Chapter 5, Section 2Chapter 5, Section 2

The Theory of The Theory of ProductionProduction

ProductionProduction

Theory of production = Theory of production = relationship between the factors relationship between the factors of production and output of goods of production and output of goods and servicesand services

The difference between The difference between short short runrun and and long runlong run

Law of Variable Law of Variable ProportionsProportions

In the short run, output will In the short run, output will change as one input is varied change as one input is varied while the others are held constantwhile the others are held constant

Relationship between the input of Relationship between the input of resources and output of the final resources and output of the final productproduct

Production FunctionProduction Function(Page 124, Figure 5.5)(Page 124, Figure 5.5)

Relationship between changes in Relationship between changes in outputoutput

Production schedule = figure lists Production schedule = figure lists hypothetical output as the hypothetical output as the number of workers varies from number of workers varies from zero to 12zero to 12

Total ProductTotal Product

Total output produced by a firmTotal output produced by a firm Plant is barely operating and has Plant is barely operating and has

1-2 workers, 1-2 workers, resources sit idleresources sit idle Rise in total product = additional Rise in total product = additional

workers added means a rise in workers added means a rise in total producttotal product

Total Product Slows = as more Total Product Slows = as more workers are added production workers are added production slowsslows

Marginal ProductMarginal Product

The extra output/change in total The extra output/change in total product caused by the addition of product caused by the addition of one more unit of variable inputone more unit of variable input

Stages of ProductionStages of Production

Based on the way marginal Based on the way marginal product changes as the variable product changes as the variable input of labor is changedinput of labor is changed

Law of Diminishing ReturnsLaw of Diminishing Returns– Stage 1 (Increasing Returns)Stage 1 (Increasing Returns)– Stage 2 (Diminishing Returns)Stage 2 (Diminishing Returns)– Stage 3 (Negative Returns)Stage 3 (Negative Returns)