Chapter 5 Supply - Theory of Production -Economics - - NAA

Law of Variable Proportions

In the short run, output will change as one input is varied while other inputs are held constant

As for total product, what happens to resources if there are too few workers?

Resources are wasted

Stages of Production What are the stages of production based on?

The change in the marginal product

Marginal product

The extra output or change in total product caused by the addition of one more unit of variable input

Stages of Production At what point are changes in marginal product of special interest?

When marginal product is negative

Stages of Production - Stage 1 - Increasing Returns When should companies stop hiring?

When marginal returns start to decrease

Based upon the Law of Variable Proportions, what happens when more than one factor of production is added?

You cannot be sure which variable input causes the change in production so you do not know for sure how to adjust.

Production function

A concept that describes the relationship between changes in output to different amounts of a single input (usually labor) while other inputs are held constant

Long run

A period of production long enough for producers to adjust the quantities of all its resources, including capital

Short run

A period of production that allows producers to change only the amount of the variable input called labor

Stages of Production - Stage 1 - Increasing Returns What is the criterion for determining how long output will rise?

As long as each new worker hired contributes more to total output than the worker before, total output rises. This is called marginal returns.

Stages of production

Increasing returns, diminishing returns, and negative returns

Stages of Production - Stage 2 - Diminishing Returns What happens to the rate of increase in production during this stage?

It is still growing but in smaller amounts

Stages of Production - Stage 3 - Negative Returns What happens to marginal product during this stage?

Marginal product is negative

Stages of Production - Stage 3 - Negative Returns What effect does this stage have on hiring?

No hiring. Companies will not hire more workers at this stage.

As for total product, what happens to output if there are too many workers?

Output decreases

Theory of Production

The relationship between factors of production and the output of goods and services

Diminishing returns

The stage where output increases at a diminishing rate as more units of a variable are added

Stages of Production - Stage 2 - Diminishing Returns What is the principle of diminishing returns?

The stage where output increases at a diminishing rate as more variable inputs are added

Total product

Total output produced by a firm

Stages of Production - Stage 3 - Negative Returns What happens to total plant output during this stage?

Total plant output decreases

Raw materials

Unprocessed natural products used in production