UNZA

Edu Econ
Theory of Production
Tommie N, PhD
 Production
The transformation of inputs into
outputs
 Deals with the
relationship between
the factors of
production and the
output of goods and
services
 Inputs
the factors of production
1. land (natural resources)
-inputs directly provided by nature
2. labour
-also called human capital
-inputs provided directly by households
-also includes the skill level and education level of the workers
ex. machinists, welders, engineers, secretaries, etc
3. capital
-also called physical capital
-different from financial capital
-machinery, equipment, buildings, etc
4. entrepreneurship
-contribution of the owners
 Outputs
result that has been created
by the inputs it can be
goods or services
 Short run
A period of production
that allows producers to
change only the
amount of the variable
input called labor
The use of at least one
factor of production that
cannot be changed, or
there are fixed inputs.
-The producer can vary
his output within
limitations.
 Long run
a period of production long enough for
producers to adjust the quantities of all
their resources, including capital.

The period is long enough to allow firms to

change the quantities of all resources
employed, including plant capacity. All
costs are variable.
Law of variable proportion

states that, in the short

run, output will change as
one
input is varied while the
others are held constant
 Raw materials
unprocessed
natural products
used in production
 total product
total output produced by the
firm,
the total amount produced
during
some particular time period
 Marginal product
The extra output or change in
total product caused by the
addition of one more unit of
variable input OR
the change in total product resulting
from a change in the use of one
input holding the quantities of all
other inputs constant
 stages of
production
increasing returns,
diminishing returns,
and negative returns
 stages of
production
-distinguished by their marginal
products;
- measures effect of workforce size on
marginal product;
 Diminishing returns
Increasing supply in product by smaller amounts.
The stage at which output increases at a diminishing rate
as more units of a variable input are added. As more of a
variable input is added to the production process, holding
the quantities of all other inputs constant, the resulting
increase in quantity will at some point, begin to diminish.
cost of producing each item (product/service) is greater
for each additional input (of labor). end result: Increasing
price of product/service. Explaining it more simply, it says
that output will decrease even if there is an increase in
one of the inputs.
 Production function
a concept that describes the
relationship between
changes in output to
different
amounts of a single input
while other inputs are held
constant
 PF shows the relationship
between quantities of various
inputs used and the maximum
output that can be produced
with those inputs used per unit
of time expressed in a table,
graph, or an equation
P (output) = f(T, C)
 Education
vs.
Normal production
- school's goal are unclear
- output only partially
observable, difficult to
understand how each input
enters the production
process
- consumers serve as inputs