Econ: Lecture 4

Production

Reference: Textbook, Reading 14

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1. Factors of production
Factors of production are the resources a firm uses
to generate output. Factors of production include:
• Land—where the business facilities are located.
• Labor—includes all workers from unskilled laborers
to top management.
• Capital—sometimes called physical capital or plant
and equipment to distinguish it from financial
capital. Refers to manufacturing facilities,
equipment, and machinery.
• Materials—refers to inputs into the productive
process, including raw materials, such as iron ore or
water, or manufactured inputs, such as wire or
microprocessors.
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2. Production function
For economic analysis, we often consider only two
inputs: capital (K) and labor (L).
The quantity of output (Q) that a firm can produce
can be thought of as a function of the amounts of
capital and labor employed.
Q = f(K,L)

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3. Diminishing marginal productivity of labor
The addition of a second worker will increase total
product by the marginal product of the second
worker. The marginal product of (additional output
from) the second worker is greater than the marginal
product of the first (benefits of teamwork or
specialization of tasks)
At some point, adding one more worker will increase
total product by less than the addition of the
previous worker, although total product continues to
increase.

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3. Diminishing marginal productivity of labor

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4. Breakeven and shutdown points of production

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4. Breakeven and shutdown points of production

Example:
A. For the last fiscal year, Legion Gaming reported
total revenue of $700,000, total variable costs of
$800,000, and total fixed costs of $400,000.
Should the firm continue to operate in the short
run?

B. Suppose instead that Legion reported total

revenue of $850,000. Should the firm continue to
operate in the short run? Should it continue to
operate in the long run?
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5. Economies of scale

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5. Economies of scale

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Homework?
All of the questions in Reading 14 (Textbook)
Prepare for the Oral test

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