Economics
The Theory of Production
The theory of production in economics focuses on the process of transforming inputs, such as labor and capital, into outputs, such as goods and services. It examines how firms make decisions about the combination of inputs to use in order to maximize output and minimize costs. This theory is essential for understanding how businesses operate and how resources are allocated in an economy.
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12 Key excerpts on "The Theory of Production"
eBook - ePubThe Microeconomics of Wellbeing and Sustainability
Recasting the Economic Process
- Leonardo Becchetti, Luigino Bruni, Stefano Zamagni(Authors)
- 2019(Publication Date)
- Academic Press(Publisher)
Chapter 4The Theory of Production decisions
Abstract
In this chapter we will focus on the basic economic activity involved in the production of goods and services. After clarifying what production means in economics, we will examine the behavior of the entrepreneurs who carry out productive activity. We will then analyze the production process and see how different types of companies organize production in different ways. Finally, after considering the cost side of production we will derive the supply curve for a single company.Keywords
What it means to produce in an economic sense; The notion of Pareto efficiency; What characterizes entrepreneurship; Types of companies; The production function; The law of diminishing returns; Returns to scale; Types of production costs; The optimal combination of production factors; Economies and diseconomies of scale; Accounting costs and economic costs4.1. The economic problem of production
4.1.1. What it means to produce in economics
Any economic system, whatever its social and institutional structure may be, whether capitalist or otherwise, must provide for the satisfaction of its members as well as perpetuate itself over time. To produce means to transform resources of one type or another, which we call inputs or factors of production , into goods and services we call outputs or products . The latter may be directly consumable, in which case we will talk about consumption goods , or they may serve to produce other goods, in which case we will talk about means of production . Inputs can be primary resources , or factors of production that are not the result of prior production processes, such as labor, land, or raw materials, as well as the means of production obtained from other processes, or capital goods such as factories, machinery, and so forth.In economics the process of transformation should be understood as the transformation of value
- Bhat, Anil(Authors)
- 2021(Publication Date)
- Daya Publishing House(Publisher)
Chapter 2 Economic Theories of Production Production refers to the economic process of converting of inputs into outputs. Production uses resources to create a good or service that is suitable for use, gift-giving in a gift economy, or exchange in a market economy. This can include manufacturing, storing, shipping, and packaging. Also level of output of a particular commodity depends upon the quantity of input used for its production. In other words production means transforming inputs land, labour, capital) into an output. 2.1. Theoretical Orientation 2.1.1. Laws of Production Theory of production is based on the following laws of production such as: “Law of Diminishing Returns/Law of Increasing Cost, Law of Increasing Returns/Law of Diminishing Cost and Law of Constant Returns/Law of Constant Cost“ 2.1.1.1. Law of Diminishing Returns/Law of Increasing Cost The law of diminishing returns (also called the Law of Increasing Costs) is an important law of micro economics. The law of diminishing returns states that: “If increasing amounts of a variable factor are applied to fixed quantity of other factors per unit of time, the increments in total output will first increase but beyond some point, it begins to decline ”. This ebook is exclusively for this university only. Cannot be resold/distributed. Richard A. Bilas describes the law of diminishing returns in the following words: “If the input of one resource to other resources are held constant, total product (output) will increase but beyond some point, the resulting output increases will become smaller and smaller ”. · (a) Operation of Law of Diminishing Returns The classical economists were of the opinion that the law of diminishing returns applies only to agriculture and to some extractive industries, such as mining, fisheries urban land, etc. The law was first stated by a Scottish farmer as such.
eBook - PDF- Sharma, Arti(Authors)
- 2021(Publication Date)
- Scholars World(Publisher)
Chapter 2 Theory of Production Function and Economic Efficiency A production function relates to physical output of a production process to physical inputs or factors of production. The production function is one of the key concepts of neoclassical theories, used to define marginal product and to distinguish allocative efficiency, the defining focus of economics. The primary purpose of the production function is to address technical efficiency, resource use efficiency and allocative efficiency in the use of factor inputs in production and the resulting distribution of income to those factors, while abstracting away from the technological problems of achieving technical efficiency, aggregate production functions are estimated to create a framework in which to distinguish how much of economic growth to attribute to changes in factor allocation and how much to attribute to advancing technology. 2.1 Concept of Production Functions The Theory of Production is mainly concerned with maximizing profit or in some instances minimizing cost. Both are indicative of economic efficiency. The profit-maximizing firm in perfect competition (taking output and input prices as given) will choose to add input right up to the point where the marginal cost of additional input matches the marginal product in additional output. This implies an ideal division of the income generated from output into an income due to each input factor of production, equal to the marginal product of each input. To satisfy the mathematical definition of a function, a production function is customarily assumed to specify the maximum output This ebook is exclusively for this university only. Cannot be resold/distributed. obtainable from a given set of inputs. The production function, therefore, describes a boundary or frontier representing the limit of output obtainable from each feasible combination of input.
eBook - PDFManagerial Economics
Problem-Solving in a Digital World
- Nick Wilkinson(Author)
- 2022(Publication Date)
- Cambridge University Press(Publisher)
However, McKinsey adds a cautionary note to this optimism. There are large network effects with digitization, because of the high fixed costs and close to zero marginal costs. These effects act as a technical barrier to entry and are likely to cause Case Study 6.1 273 6.2 Basic Terms and Definitions What is production theory? Normally, when economists use the term ‘production theory’ they are referring to the specific stage of the overall production process described in the introduction relating to production itself. Essentially, production theory examines the physical relationships between inputs and outputs. By ‘physical relationships’ we mean relationships in terms of the variables in which inputs and outputs are measured: number of workers, tons of steel, barrels of oil, megawatts of electricity, hectares of land, number of drilling machines, number of automobiles produced, and so on. Obviously, managers are concerned with these relationships because they want to optimize the production process, in terms of efficiency. Certain important factors are taken as given here: we are not considering what type of product we should be producing, or the determination of how much of it we should be producing. The first question relates to the demand side of the firm’s strategy and is connected with the first two stages of the overall production process: research and data analysis, and design. The second question involves a consideration of both demand and cost, which is examined in a later chapter on pricing. What we are considering in this chapter is how to produce the product in terms of the implications of using different input combinations at different levels of output. For example, we can produce shoes using factories that make extensive use of automatic machinery and more skilled labour in terms of machine operators, or we can produce them in factories involving more labour-intensive methods and more unskilled labour.
- Berkeley Hill(Author)
- 2013(Publication Date)
- Pergamon(Publisher)
CHAPTER 5 Production Economics (Theory of the Firm) Note on Chapter 5: this chapter contains essential material for students whose prime interest is business management. However, those with major interests in other areas may prefer to pass on first reading to the last section on Time and Scale of Production. The omission of the first part of this chapter will not undermine their understanding of subsequent chapters. The Scope of Production Economics Production Economics studies how one sector of the economic system, firms, allocate their resources in the pursuit of given objectives. Parallels exist between this area of economic theory and the Theory of Consumer Choice already encountered in Chapter 2. When the Theory of Consumer Choice attempted to explain how individual consumers allocated their purchasing power, it was assumed that the goal of any consumer was to maximise his satisfaction. Similarly, in Production Economics the assumption is made that the goal of any firm is the maximisation of profit. However, the two areas of theory differ in that profit, unlike personal satisfaction, is fairly easily measured. (Note that in this chapter the term profit is used rather loosely and in an accountancy sense to refer to the difference between revenues and whatever costs are being considered at the time.) Production Economics recognises that in practice firms do have other objectives (or goals) besides profit. These were discussed in relation to the Theory of Supply (Chapter 3) and included the avoidance of risk, the prestige of the business and the personal preferences of the entre-preneur. For the sake of simplicity, however, Production Economics 120 Production Economics 121 assumes that the sole objective of production is the maximising of profits.
eBook - ePubEconomic Systems Analysis and Assessment
Intensive Systems, Organizations,and Enterprises
- Andrew P. Sage, William B. Rouse(Authors)
- 2011(Publication Date)
- Wiley-Interscience(Publisher)
CHAPTER 2 PRODUCTION AND THE THEORY OF THE FIRM 2.1 INTRODUCTIONWe will use the word production or productivity in a very general sense to denote all activities that satisfy consumer demand for goods and services. In the classic use of the term, production is associated with the use of natural resource inputs to produce finished products that are subsequently marketed to consumers through various service efforts. In the initial part of this book, we will be concerned with this classic interpretation. In the later part, we will also consider production of inherently information and knowledge intensive products, such as software. Production is therefore one of the basic components of microeconomic theory. A (classic) firm is a unit that uses natural resource inputs, capital, and labor to produce output goods or services for purchase by consumers. The economic problem faced by a production unit or a firm is that of determining the quantity of output to produce and the amounts of the various input factors to be used in the production process. This will depend, of course, on technological relationships between the prices or costs of input factors, or input supplies, and the price that can be obtained for the output quantity, which is a function of the demand for the product of the firm. This is a problem in resource allocation that involvesFigure 2.11. the technology of the production process or the production function,2. the price, or equivalently costs, of the input resource quantities or input factors such as labor, natural resources, and capital, and3. the price of and demand for the output quantity.
- Roberto Serrano, Allan M. Feldman(Authors)
- 2018(Publication Date)
- Cambridge University Press(Publisher)
Part II Theory of the Producer 8 Theory of the Firm 1: The Single-Input Model 8.1 Introduction Production is the transformation of inputs into outputs. The production process typically takes place within firms. They buy or hire various inputs, and combine them using available technology to produce various outputs of goods and services. They then sell the outputs they produce. For example, a firm that makes video games hires different kinds of labor (game experts, programmers, sales people, accountants, lawyers, and so on) and buys or rents various capital goods (office space, computer equipment, internet access, furniture, and so on) to make and market games. A farm, whose land and machinery are more or less fixed in the short term, employs labor to produce corn. In the farm example, it’s plausible to think of the production process as one that uses one input to produce one output. In this chapter, we will develop a simple production model with just one input and one output; we call it the single-input/single-output model . At the end of the chapter, we will briefly describe a model with a single input and multiple outputs – most firms in reality have many outputs – and we will provide techniques for solving its profit-maximization problem. Later, in the next chapter, we will move on to the case of the production of a single output with multiple inputs, the multiple-input/single-output model . Focusing on the simple single-input/single-output model is definitely not the usual textbook approach. Most books on microeconomics start with a two-input/one-output model, the kind that we will cover in our next chapter. We think that either approach – single input/single output or multiple input/single output – can be used to introduce a reader to the most important implications of the theory of the firm.
eBook - PDF- Kumar, K Nirmal Ravi(Authors)
- 2021(Publication Date)
- Daya Publishing House(Publisher)
From the above discussion, it is clear that, a production function is an expression of quantitative (physical) relation between change in inputs and the resulting change in output. So, it is expressed as Y = f(X 1 , X 2 , X 3 , —, Xn). In microeconomic analysis, conventionally, we study the following two aspects of relation between inputs and output. ‘In what manner the output changes, if only one of the inputs is varied and other inputs are kept constant ’. This falls under Short run production function explained by LDR. ‘In what manner the output changes, if all the inputs all varied simultaneously and in the same proportion’ . This This ebook is exclusively for this university only. Cannot be resold/distributed. falls under long run production function and is explained by the concept of RTS. Technical unit: It refers to a convenient unit of studying about production programme. It also refers to a single convenient unit in production for which output, costs and returns will be worked. e.g .: Cost of cultivation of paddy per hectare. Economic unit : It is also called as ‘Plant’. It refers to aggregation of all the individual units for which output, costs, returns will be worked as whole. e.g .: Cost of cultivation of paddy in a college farm say, in 17.55 hectares. Production period: It is also called as Transformation period. It is defined as the period taken by the resources and resource services to be completely transformed into final product in a production programme. For example, production period of paddy is 120 days. Farm productivity: Farm productivity implies output per unit of land. For example, productivity of paddy is 2.5 tonnes/ha. Choice indicator: Choice indicator is an yardstick or criterion indicating, which of the available alternatives will optimize or maximize the given objective or given end. That is, the farmer has to opt for one of the available alternatives in a given production programme, so as to minimize the cost or maximize the profits.
eBook - PDF- Theodor Nebl(Author)
- 2018(Publication Date)
- De Gruyter Oldenbourg(Publisher)
It analyzes the relationships between the elementary factors of production evaluated with factor prices, meaning costs of input and output on products and performances on a quantity basis. Therefore the cost theory examines value movements (cf. Fig. B.5.(2)). PRODUCTION THEORY Output quantities : Input quantities Multiplied with factor prices COST THEORY -> Output quantities : Input costs < Fig. B.5.(2): Production theory and cost theory 5.1 Fundamentals 5.1.1 Production function The production theory analyzes the relation • Factor return to factor use Between both there is a functional connection which can be represented as follows: r x Return quantity (produced quantity of output) Return quantity of the elementary factors of production 1, 2,..., n This functional connection is designated a production function. Production The production function clarifies which changes of the function return come if the input quantity of the elementary factors of production is varied. Produktions- und Kostentheorie 249 Gutenberg Produktivitätsbeziehung nennt (vgl. Albach [Theorie der Unternehmung] 63). Die Kostentheorie baut auf die Produktionstheorie auf. Sie unter- | Kostentheorie sucht die Beziehungen zwischen den zu Faktorpreisen bewerteten Elementarfaktoren, also Kosten des Inputs und dem mengenmäßi-gen Output an Produkten und Leistungen. Die Kostentheorie er-forscht damit Wertbewegungen (vgl. Bild B.5.(2)). Bild B.5.(2): Gegenstand der Produktions- und Kostentheorie 5.1 Grundlagen 5.1.1 Produktionsfunktion Die Produktionstheorie untersucht die Beziehung • Faktorertrag zu Faktoreinsatz Zwischen beiden Größen besteht ein funktionaler Zusammenhang, der folgendermaßen darstellbar ist: x - Ertragsmenge (produzierte Menge an Output) r - Einsatzmenge der Elementarfaktoren 1, 2,..., n Dieser funktionale Zusammenhang wird als Produktionsfunktion bezeichnet.
- Humberto Barreto(Author)
- 2009(Publication Date)
- Cambridge University Press(Publisher)
2.1 Production Function 2.1.1 Production Function Let us choose that function P = bL k C k − 1 and find such numerical values of b and k that P will “best” approximate P [product or output] in the sense of the Theory of Least Squares. Then relative to the indices and the period we have the norm P = 1 . 01 L 3 / 4 C 1 / 4 . Charles W. Cobb and Paul H. Douglas The production function is the backbone of the Theory of the Firm. It describes the current state of technology and how input can be transformed into output. The production function can be displayed in a variety of ways, including product curves and isoquants. In every optimization problem faced by the firm, the production function is included. Key Definitions and Assumptions Inputs , or factors of production , are used to make output , or product . As shown in Figure 2.1.1.1 , the firm is a highly abstract entity – a black box – that simply transforms inputs into output. Inputs are often broken down into large categories: land, labor, raw mate-rials, and capital. Capital can be confusing. Capital, K , as a factor of produc-tion means physical capital goods such as machinery, tools, or equipment. That is different from financial or venture capital that is a fund of money. Like labor, capital is rented. The firm does not own any of its machines. This is extremely unrealistic but allows us to avoid complicated issues in-volving depreciation, financing of machinery purchases (debt versus equity, for example), and so on. Like the consumer, the firm exists only for a nanosecond. It makes deci-sions about how much to produce to maximize profits with no time horizon. It produces the output in an instant. Another simplifying assumption is that the firm produces only one prod-uct. That makes revenues simply price times quantity sold. 267 268 Production Function Inputs Outpu t Figure 2.1.1.1.
eBook - PDFEconomic Models of Climate Change
A Critique
- S. DeCanio(Author)
- 2003(Publication Date)
- Palgrave Macmillan(Publisher)
4 The Representation of Production 94 4.1 Introduction “Tastes” and “technology” are the fundamentals upon which neoclassi- cal general equilibrium models are built. While the representation of tastes is expressed through utility and demand functions, the underly- ing productive technology of the economy is represented by production functions that relate various quantities of various inputs to the output produced by firms. This approach requires a behavioral theory that describes the activity of firms as they carry out the processes of produc- tion. The behavioral theory is profit maximization, which parallels the utility maximization of consumers on the demand side of the economy. While some of the conceptual and mathematical difficulties that plague the representation of preferences are common to the treatment of pro- duction in the models, there are several important differences. Because of the way firms are defined, there are no wealth effects that could create the kind of multiple equilibria that we have seen in exchange models that embody consumer preferences. 1 Consumers maxi- mize utility subject to their budget constraints, which, as in the models of Chapters 2 and 3, depend on the endowments of the different kinds of goods over which the consumers have property rights. In the neo- classical representation of the firm, the firm has no endowments – it simply hires factors of production and maximizes profits, subject to its technology of production. Because it has no endowments of inputs, there can be no wealth effects associated with changes in relative input prices. As a consequence, the factor demand curves are invariably downward-sloping functions of the factor’s “own price.” Mathematically, imagine a firm that produces a single output with a market price p. (There is no difficulty in generalizing to multiple outputs.) The conventional assumption (as in Chapters 2 and 3) of perfect competition will be maintained throughout.
eBook - PDFThe Economics Of Livestock Systems In Developing Countries
Farm And Project Level Analysis
- James R Simpson(Author)
- 2019(Publication Date)
- CRC Press(Publisher)
Cost functions and production functions are derived from the same technical input/output relationship (Doll and Orazem, 1978). As such, these functions need to be studied together in order to understand and effectively utilize these important tools in livestock-systems analysis. The production function describes the rate at which inputs are transformed into outputs in a given time period--for example, fertilizer into forage or grain to weight gain on steers. Some production functions of interest to cattlemen for evaluating production alternatives include relationships of gain by weight classes, sexes and breeds of cattle on different type forages. Other useful information would be alternative forage yield responses with different input combinations such as fertilizer, mowing or water. Additionally, data on interrelationships such as average daily gain from supplemental feeding and various carrying capacities can be useful. A typical production function is shown in Figure 2.2. Symbolically, a production function can be written as where Y is output and x 1 .. .xn are different inputs (also called resources or factors of production). The f' means function of, showing that a unique amount of output is obtained from a given set of inputs. Some of the inputs can be varied while others are not allowed to vary. A vertical line separates the inputs into the ones being varied and the fixed ones. For example, means that X 1 is being varied while the others are being held constant. 0 I I POINTOF I TANGENCY -.I A INPUT(X) I I STAGE Ill I INPUT (XI FIGURE 2.2 THE CLASSICAL PRODUCTION FUNCTION AND THE THREE PRODUCTION STAGES. 23 24 One difficulty in systems work is the paucity of production function data. As a consequence, researchers (not to mention livestock owners) are often required to utilize the few observations available for their estimates and make rather gross interpolations between the data points.
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