Theory of Production
GROUP 3
The theory of production
The theory of production is an ana- lysis of input-output relationship in the
short-run as well as in the long-run.PRODUCTION THEORY
Firms, in making production decisions, must determine the technologically
and economically efficient combination of inputs to utilize. In
transforming inputs to outputs, a firm can use many (possible) different
ways (i.e. technological efficiency) and likewise, must determine which
among way to incur least cost or which will allow them to maximize
output given a specific cost (i.e. economic efficiency
Production Input
A firm utilized insputs to produce a desired product.
LAND LABOR CAPITAL
02.
CONTAINS THE FUNCTIONAL
RELATIONSHIP BETWEEN
OUTPUT AND BASIC FACTOR OF
OUTPUT AND A BASIC FACTOR IN
THE FORM OF LAND.
01.
PRODUCTION FUNCTION
relates the output of a firm to the
amount of inputs used, typically
labor and capital.
01
After some optimal level of capacity
utilization, the addition of any larger amount of
a factor of production will inevitably yield
The Law of decreased per unit incremental returns
Diminishing Returns
The law of diminishing returns is a theory in economics that
02
Diminishing retums are the decrease in
predicts that after some optimal level of capacity is reached, marginal output of a production process as
adding an additional factor of production will actually result in the amount of a single factor of production
smaller increases in outputs. is incrementally increased, holding all other
facters of production equal.
03
Beyond the optimal level of capacity, every
additional unit of production factor will result
in a smaller increase in output while keeping
the other production factors constant
Diminishing Returns and
Maximum use of resources
As will be shown later, maximum profit does not
necessarily correspond to the full use of plant
size. Resource utilization for profit depends on
cost behavior and price. maximization
Nevertheless, a maximum input is provided within
which short-run optimization takes effect.
ICE BREAKER NGA MUNA TAYO…
4 pics 1 word with EXTREME 😈
jumbled words
NOITDUCPORTION IQSOUN
PRODUCTION ISOQUANT
DUCORPNIOT
_______
PRODUCTION
ISOCOST
TALCAPI
CAPITAL
L
B
O
A
R
L
A
B
O
R
Production Isoquant
PRODUCT ISOQUANT
An isoquant broken down in latin means equal quantity
with iso meaning equal and quant meaning quantity.
Essentially the curve represents a consistent amount of
output. The isoquant is known alternatively as an equal
product curve or a productión indifference curve.
A line on a graph, used in the study of microeconomics,
that charts all the Combinations of inputs that will
produce the same output
Assume a continuous increase in labor input
and, therefore, a decrease in capital input.
Marginal product (MP) of labor (output/Ainput)
decreases while its reciprocal (Ainput/output)
The law of increases due to the influence of the law of dimi-
nishing returns. On the other hand, the marginal
diminishing returns product (MP) of capital in- creases while its
reciprocal decreases with the opposite influence
and the shape of of this law as less of the resource input is
the curve utilized. Therefore, for every unit or constant
units of output foregone and then re- gained by
continuously decreasing capital input and
increasing labor input, respectively, the following
relationship should follow:
Hierarchy of Isoquant
REPRESENTS THE DIFFERENT
LEVELS OF OUTPUT THAT CAN BE
PRODUCED BY VARYING LEVELS OF
RESOURCES INPUT
Isocost line
A GRAPH THAT SHOW (VARIOUS)
POSSIBLE COMBINATIONS OF INPUTS
(LABOR/CAPITAL) THAT CAN BE
PURCHASED FOR AN ESTIMATED
TOTAL COST.
Least Cost Combination
THE OPTIMAL BLEND OF PRODUCTION
FACTORS LABOUR, CAPITAL, LAND & RAW
MATERIALS THAT A (FIRM) USES TO PRODUCE &
GIVEN LEVEL OF OUTPUT AT THE LOWEST
POSSIBLE COST. (COMPANY /
ORGANIZATION/BUSINESS OWNER
What is return to
scale ?
Returns to scale in economics refers to a term that
states that the degree of change in input factors
changes the output proportionally and concurrently
during the production process. It reflects the
quantitative change that applies in the long-term
using similar technology. It forms the basis of
measuring a firm’s or industry’s efficiency of
production capacity.
As plant size and plant capacity increase, returns to
scale assumes the following forms with the
corresponding effects on productivity, in succession:
The hierarchy of production func- tions and isoquant
curves in Figure 4.7, reflect these forms of returns to
scale. If returns to scale is increasing, the up- ward
shift in the production function curve accelerates
where the additional output for every additional output
for every additional unit of input (AQ/AI) increases.
Conversely, the upward shift in the production is
isoquant curve dece- lerates as the additional input
required for every additional unit of output (AI/AQ)
decreases. On the other hand, the opposite pattern is
true if returns to scale is decreasing. Finally, the shifts
in the two curves and, therefore, (AQ/AI) and (AI/AQ)
are likewise constant if returns to scale is constant.
Return to scale and
underlying conditions Problems
*communication problem
*errors in decision makings
*Difficult to monitor the activities
below
*delays in decision makings
Solution
*automation
*communication facilities
*organizational innovation
THANK YOU
GROUP 3
DAGANTA
OSORIO
MANZANILLA
BETONIO
ALBOTRA
