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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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.
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