THEORY OF PRODUCTION-chapter-5
THEORY OF PRODUCTION-chapter-5
Lesson Objectives
To explain the input output
relationship;
Economies and
Diseconomies of Scale.
What is Theory?
of production.
What is Production?
Production is basically an
activity of transformation ,
which connects factor
inputs and outputs.
Basic Concepts of Production Theory:
Classifications of Inputs
(v) time.
variables.
happen.
Two Elements of Production
production process.
(Example: To manufactured sugar, Fixed Inputs
the inputs are: sugarcane, labor,
chemicals, machinery, and (Machineries and equipment, building, factory
intrepreneur to sell the product.)
plant. Fixed Input is also expenditure in
production so it is known as FIXED COST.)
Examples include major pieces of equipment, suitable factory space, and key
managerial personnel.
The law of diminishing returns, also referred to as the law of diminishing
increased, there will be a point at which the marginal per unit output will start to
decrease, holding all other factors constant. In other words, keeping all other
factors constant, the additional output gained by another one unit increase of the
input variable will eventually be smaller than the additional output gained by the
previous increase in input variable. At that point, the diminishing marginal returns
take effect.
A Farmer Example of Diminishing
Returns
Consider a corn farmer with one acre of land. In addition to land, other factors
include quantity of seeds, fertilizer, water, and labor. Assume the farmer has
already decided how much seed, water, and labor he will be using this season. He
is still deciding on how much fertilizer to use. As he increases the amount of
fertilizer, the output of corn will increase. It may also reach a point where the
output actually begins to decrease since too much fertilizer can become
poisonous.
The law of diminishing returns states that there will be a point where the additional
output of corn gained from one additional unit of fertilizer will be smaller than the
additional output of corn from the previous increase in fertilizer. This table shows
the output of corn per unit of fertilizer:
As the farmer increases from one to two units of fertilizer, total
fertilizer is 150 (250 - 100). From two to three units of fertilizer, the
total output increases from 250 to 425 ears of corn, a 175 marginal
increase.
Production Function of Rice
Production Schedule of Rice
TOTAL PRODUCT
2 4 2 2
3 10 6 3.33
4 18 8 4.5
5 27 9 5.4
6 27 0 4.5
7 23 -4 3.22
8 18 -5 2.25
9 12 -6 1.33
Analysis:
maximum output that will yield through employing 5 and 6 farmers in 27 cavans.
This is the point in the graph where it has attained peacked and the started to
decline. After the additional farmers (variable input) it employs to be able to harvest
more cavans of rice. There is a point where the total product already start to
diminish. That is the diminishing return or diminishing marginal product. The reason
is how many farmers you employ as long as the size of land (fixed input) is still the
1 2 3 5 2 3 5 3 5 0
2 2 9 11 1 4.5 5.5 6 10 -1
3 2 12 14 0.66 4 4.66 3 15 1
4 2 16 18 0.5 4 4.5 4 20 2
5 2 20 22 0.4 4 4.4 4 25 3
8 2 40 42 0.25 5 5.25 8 40 -2
Total fixed costs are the sum of all expenses that are constant that a
company must pay.
2. Total Variable Cost = Total Cost- Total Fixed Cost
TVC= TC- TFC
3. Total Cost = Total Fixed Cost+ Total Variable Cost
TC= TFC+TVC
For example, you could recognize that you produce 10,000 units
every two months and use that time constraint to figure out your
fixed costs.
6. Average Total Cost = Total Cost/ Quantity
AC= TC/ Qty
To calculate marginal cost, you will need to take the change in total cost divided
by the change in total output.
8. Total Cost in the sum of all the fixed and variable
cost in producing a product over period of time
9. Fixed Cost The cost incurred which does not
change regardless of the volume of the product
produce.
10. Variable Cost- The Cost incurred that change as output is produced over
a period of time.
11. Marginal Cost- Is the additional Cost incur in producing additional unit
of product
Short Run - This period of time in production where only the
variable inputs/cost could be changed.