LUNAR INTERNATIONAL COLLEGE

DEPARTEMENT OF BUSINESS ADMINISTRATION

Individual Assignment of Managerial Economics

Governance Section 4

Prepared by Id Number
Geremew Worku------------------------------------------1GSROBA/0050/15

JULY 7, 2023
SUBMITTED TO: - BUZEYE.Z (PhD)
Review on the theory of production

Introduction

The article provides a comprehensive overview of the theory of production, which is a

fundamental concept in Managerial economics. It introduces the reader to the basic principles
and concepts related to production and its significance in economic systems. it aims to offer a
theoretical framework that explains how inputs are transformed into outputs, and how
productivity can be enhanced through various factors. The article delves into the key components
of production theory, including inputs, production functions, and the role of technology. The
article begins by introducing the fundamental concept of production and its significance in
economic theory.

It highlights that production involves transforming inputs (such as labor, capital, and raw
materials) into outputs (goods or services) using a combination of technology and processes. The
author emphasizes the importance of understanding different types of inputs in the production
process. These include physical inputs (e.g., machinery, materials), human inputs (e.g., labor),
and intangible inputs (e.g., knowledge, skills). The article explores how these inputs interact with
each other to determine productivity levels. The core concept discussed in this section is the
production function, which represents the relationship between inputs and outputs. It also
highlights how these functions can be used to measure productivity growth over time as well as
Technology plays a crucial role in determining productivity levels in any given industry or
economy.

The article examines how technological advancements impact production processes by

improving efficiency, reducing costs, and increasing output levels. It discusses both labor-
intensive and capital-intensive technologies and their implications for productivity growth. This
section explores several factors that influence productivity levels within an organization or
industry. These include economies of scale, specialization, human capital development, research
and development investments, infrastructure availability, government policies, etc.

The article emphasizes the importance of considering these factors when analyzing productivity
dynamics. Overall, "The Theory of Production" offers a detailed overview of the concept of
production and its underlying dynamics. It provides a comprehensive theoretical framework
supported by empirical evidence and case studies. The article's in-depth analysis makes it a
valuable resource for economists, policymakers, researchers, and anyone interested in
understanding the intricacies of productivity growth.

Central Point
 Factors of Production: The article identifies four primary factors of production - land,
labor, capital, and entrepreneurship. It explains how these factors interact to create goods
and services, emphasizing their significance in determining the overall productivity
levels.
 Production Function: The central element discussed in this section is the production
function, which represents the relationship between inputs (factors of production) and
outputs (goods or services). The article explores various mathematical models used to
represent production functions, such as Cobb-Douglas and Leontief functions.
 Returns to Scale: This section delves into the concept of returns to scale, which
examines how changes in input quantities affect output levels. It discusses three types of
returns to scale - increasing returns, constant returns, and decreasing returns -
highlighting their implications for production efficiency.
 Technical Efficiency vs. Economic Efficiency: The article distinguishes between
technical efficiency (achieving maximum output with given inputs) and economic
efficiency (maximizing output while considering input costs). It emphasizes that
economic efficiency is crucial for sustainable growth and resource allocation decisions.
The article "The Theory of Production" effectively presents the central elements and
structure of ideas related to production theory. It covers essential concepts such as
factors of production, production functions, returns to scale, and efficiency measures.
The article's clear organization and detailed explanations make it a valuable resource for
anyone seeking a comprehensive understanding of production theory.

Scope
The article "The Theory of Production" aims to provide a comprehensive understanding of the
concept of production and its various dimensions. It delves into the core principles, factors, and
processes involved in production, offering insights into both microeconomic and macroeconomic
perspectives. By defining the scope of this article, we can better understand the specific areas
covered and the depth of analysis provided.

 Microeconomic Scope: Within the microeconomic scope, this article explores

production as it relates to individual firms or industries. It delves into concepts such as
inputs, outputs, technology, and efficiency. The article examines how firms make
decisions regarding resource allocation, production techniques, and cost minimization
strategies. It also discusses different types of production functions, including linear and
non-linear relationships between inputs and outputs.
Furthermore, this microeconomic analysis extends to topics such as economies of scale
and scope. The article explores how firms can achieve cost advantages through increasing
their scale of operations or diversifying their product offerings. Additionally, it
investigates the role of competition in shaping production decisions and market
outcomes.
 Macroeconomic Scope: Moving beyond individual firms or industries, this article also
encompasses macroeconomic aspects of production. It explores how aggregate levels of
output are determined within an economy. The article discusses key macroeconomic
indicators such as Gross Domestic Product (GDP), national income accounting methods,
and measures of productivity growth. Moreover, the article delves into broader issues
related to economic growth theories.
It examines how factors such as technological progress, human capital accumulation, and
institutional frameworks impact long-term economic development. The role of
government policies in promoting productive activities is also explored within this
macroeconomic context.
 Interdisciplinary Approach: In addition to its microeconomic and macroeconomic
focus on production theory, this article adopts an interdisciplinary approach by
incorporating insights from related fields such as industrial organization, management
science, operations research, and innovation studies. It aims to provide a holistic
understanding of production by drawing upon diverse perspectives and methodologies.
 Critical Point

The article presents a comprehensive analysis of the factors influencing production and offers
insights into the relationship between inputs and outputs. The critical point of an article on this
theory could be to explain and analyze various aspects such as:

 Factors of Production: The article may discuss the different factors that contribute to
production, including land, labor, capital, entrepreneurship, and technology. It may delve
into how these factors are combined and utilized by firms to maximize output.
 Production Functions: The article might explore different types of production functions
such as linear, quadratic, or Cobb-Douglas functions. It could explain how these
functions represent the relationship between inputs and outputs and how they can be
used to measure productivity.
 Efficiency and Productivity: The article may emphasize the importance of efficiency
and productivity in production theory. It could discuss concepts like technical efficiency
(achieving maximum output with given inputs) and allocative efficiency (using inputs in
the most cost-effective way).

Conclusion

In conclusion, the theory of production is a fundamental concept in economics that explains how
inputs are transformed into outputs in the production process. It helps us understand the
relationship between inputs, such as labor and capital, and outputs, such as goods and services.

The theory of production is based on several key assumptions, including the existence of fixed
and variable inputs, the law of diminishing returns, and the goal of maximizing profits or
minimizing costs. It also considers factors such as technology, economies of scale, and resource
constraints.

One important aspect of the theory is the concept of production functions, which represent the
relationship between inputs and outputs. These functions can be used to analyze various aspects
of production, such as determining optimal input combinations or evaluating productivity.
Additionally, the theory of production provides insights into factors that can affect production
efficiency and output levels. For example, it highlights the importance of investment in capital
goods and technological advancements in increasing productivity.

Overall, understanding the theory of production is crucial for businesses and policymakers to
make informed decisions regarding resource allocation, investment strategies, and economic
growth. It provides a framework for analyzing and optimizing production processes to achieve
desired outcomes.