5.2 theory of production

7/27/2019 5.2 Theory of Production

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Click the Speaker button to listento the Cover Story.

Click the mouse button or press the Space Bar to display theinformation. Section 2 begins on page 122 of your textbook.

Objectives

After studying this section, you will be able to:

Lets Think About This

Diminishing Returns Has the quality of yourwork ever declined because you worked too

hard at something? Sometimes you reach astage where you still make progress but at adiminished rate.

5.2 Theory of Production

Explain the theory of production. Describe the three stages of production.
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Click the mouse button or press the Space Barto display the information.

Introduction

Producing an economic good or servicerequires the 4 factors of production.

The theory of production deals with the

factors of production and the output ofgoods and services.

Suppliers face a difficult task.


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Introduction (cont.)

The theory of production generally is based

on the TWO runs. Short run, brief period of production that

allows producers to change only theamount of the variable input

(workers/labor). For example, Ford Motors hiring 300 extra

workers for one of its plants is a short-runadjustment.


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If Ford builds a new factory, this is a long-

run adjustment.

Long run, a period of production longenough for producers to adjust the

quantities of all their resources, includingcapital.


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The Production Function

Shows how total output changes whenthe amount of a single variable input(labor) changes while all other inputs areconstant.


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The Production Function (cont.)

as moreworkers areadded, total

product risesuntil a pointthat addingmore

workerscauses adecline intotal product.

total outputthe companyproduces.

extra outputorchange intotal productcaused byadding onemore unit ofvariable

input.


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Discussion Question

From your experience in working in

groups for a class assignment, howmany students make up a productiveteam? When is adding more groupmembers likely to cause a decline in

total product?


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Stages of Production

In Stage I, (increasing returns), marginaloutput increases with each new worker.

Companies are

tempted tohire moreworkers,whichmovesthem toStage II.


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Three Stages of Production

In Stage II, (diminishing returns),

total production keeps growing butthe rate of increase is smaller;

each workeris stillmaking apositivecontributionto total

output, but itisdiminishing.


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Three Stages of Production (cont.)

In Stage III (negative returns), marginal

product becomes negative, decreasing totalplant output.

5.2 theory of production

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