PRODUCTION

THEORY
Production
- refers to the economic process of
converting of inputs into outputs. Production
uses resources to create a good or service that is
suitable for exchange. This can
include manufacturing, storing, shipping,
and packaging. Some economists define
production broadly as all economic activity other
than consumption. They see every commercial
activity other than the final purchase as some
form of production
 Production is a process, and as such it occurs through
time and space. Because it is a flow concept, production
is measured as a “rate of output per period of time”.
There are three aspects to production processes:

1.the quantity of the good or service produced,

2.the form of the good or service created,
3.the temporal and spatial distribution of the good or
service produced.

 Firm/ Seller/ Producer

- Deciding about the input combination to profit
maximization & cost minimization
PRODUCTION FUNCTION
 - refers to the relationship between inputs that are required and
outputs that are obtained

 Input - refers to the different ingredients used to produce goods and

services
 Outputs – refers to the goods and services that result from the
production process
A production function can be expressed in functional form as the
right side of:

 Q = f(X1,X2,X3,...,Xn)
where:Q = quantity of outputX1,X2,X3,...,Xn = quantities of factor inputs
(such as capital, labour, land or raw materials).
 Production Function
-specifies the units of output that can be produced
from a given set of inputs. (How many units of inputs
must be combined to produce so much of an output)
- it summarizes the characteristics of existing
technology at a given point in time; it shows the
technological constraints that a firm must reckon with.
- shows the most output that existing technology
permits the firm to extract from each quantity of inputs.
TYPES OF INPUTS
 Fixed Input – is one whose quantity cannot change
during the period of time under consideration.
(ex: plant & equipment, factory, office, building,
machinery, and transportation facilities)

Variable inputs – is one whose quantity can be change

during the relevant period.
 (ex: labor)
PRODUCTION PERIODS
- the length of time which the firm can vary the amount
of productions input to be used.

Immediate period- the time is too short for the firm to vary
the quantity of is inputs.
THE SHORT RUN AND LONG RUN
 Short Run – defined as the period of time in which at
least one of the firm’s inputs is fixed (cannot be
changed)
- generally understood to mean the length of
time during which the firm’s plant and equipment are
fixed.

 Long Run – is that period of time in which all inputs are

variable.
- all resources can be shifted from one
form of production into another