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PRODUCTION AND PRODUCTION COST - Coggle Diagram
PRODUCTION AND PRODUCTION COST
Definition
Production means the process of using the factor of production to produce goods and services.
Production is the process of transforming inputs into outputs.
INPUT
Inputs refers to the factors of production that a firm use in the production process.
PROCESSING
OUTPUTS
Refers to what we get at the end of the production process that is finished products.
CLASSIFICATION OF FACTORS OF PRODUCTION
ENTREPRENEUR
A person who combines the different factors of production, and initiates the process of production and also bears the risk
CAPITAL
Part of man-made wealth used for further production
LABOUR
Physical or mental activities of human beings
LAND
All natural resources or gift of nature
PRODUCTION FUNCTION
A production function is a statement of the functional relationship between inputs and outputs, where it shows the maximum output that can be produced with given inputs.
SHORT-RUN AND LONG-RUN
PRODUCTION FUNCTION
Fixed Input
An input which the quantity does not change according to the amount
of output.
Example: Machinery, land, buildings, tools, equipment, etc.
Short-run and Long-run Periods
Short run period is the time frame, which at least one of the inputs (factor of
production) is fixed and other inputs can be varied.
Long run period is the time frame which all inputs are variable.
Variable Input
An input which the quantity changes according to the amount of
output.
Example: Raw materials, electricity, fuel, transportation, communication,
etc.
SHORT-RUN PRODUCTION
FUNCTION
In the short run, we assume that at least one of
the inputs is fixed that is capital.
SHORT-RUN PRODUCTION
FUNCTION (cont.)
LAW OF DIMINISHING MARGINAL RETURNS
It states that if the quantities of certain factors are increased while the quantities of one or more factors are held constant, beyond a certain level of production, the rate of increase in output will decrease
“Law of diminishing marginal returns states that as more of a variable input is used while other input and technology are fixed, the marginal product of the variable input will eventually decline”
STAGES OF PRODUCTION
Stage III
Proportion of fixed factors is lower than variable factors
Increase in variable factors decline the TP because of overcrowding
A producer would not like to operate at this stage
Stage II
Called law of diminishing returns
The most efficient stage of because the combinations of inputs are fully utilized
Stage I
Proportion of fixed factors are greater than variable factors
Under utilization of fixed factor
Operation involves a waste of resources