The document discusses the key factors of production - land, labor, capital and entrepreneurship. It explains that production involves using these inputs to process outputs. The factors of production are defined, with labor comprising human resources, capital comprising funds used to acquire physical resources, and land comprising natural resources. The production function shows the maximum output attainable from input combinations. Short run production has at least one fixed input, while long run production has no fixed inputs. The stages of production - increasing, diminishing then negative returns - are explained with examples.

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Production
Theory

2. FACTORS OF PRODUCTION
 Production or supply represents the sellers or
supplier’s side and their willingness and
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ability to produce and sell goods and services
(output)
Input Processing Output
 Production involves the using of inputs
 Inputscan be categorized into 4 types which
are land, labor, capital and entrepreneur
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3.  Labour
Labor comprises all the human resources in the form of workers,
employees, professionals, self-employed who produce goods and
services
 Capital
Capital can be defined as the funds or finance which can be used
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to acquire equipment, machine, infrastructure and other physical
resources required to produce goods and services
 Land
Land is natural resources used to produce goods and services
including land itself and natural resources such as vegetables
and crops, mineral and oils
 Entrepreneur
Entrepreneur is the person who has the ability to take risk, to turn
new ideas and innovations into profitable undertakings to produce
goods and services.
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4. PRODUCTION FUNCTION
 The technological relationship expressing the
maximum amount of a product attainable from
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different combinations of factor inputs or it
shows units of total output (Q) as a function of
units of inputs
 Mathematically it can be expressed by
 Q=f(labor, land, capital, entrepreneur)
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5. Production Time
Range
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Short run Long run
Production Production
 At least one fixed input + variable  No fixed input
inputs  Law of Return to Scale
 Law Diminishing Marginal Return 5

6. SHORT RUN PRODUCTION FUNCTION
 A short run can be defined as the production period in which at
least one of the inputs is fixed
 A fixed input is an input which the quantity does not vary
according to the amount of output
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A fixed input is one which is permanent and stays in the
production by the same quantity regardless of whether there is
output or not
Examples a machine, building and equipment
 A variable input is an input which the quantity varies according
to the amount of output. More output means more variable
inputs needed
Examples are labor, raw material 6

7.  Ingeneral, short run production function can be
written as:
Q = f(variable inputs, fixed inputs)
 The short run period is a time period during which at
least one input is fixed and its quantity cannot be
varied
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 The
production is subjected to the law of diminishing
marginal returns
 The law states that when the more and more of
variable input is combined with a fixed input, beyond
some point of production, the additional output from
each additional unit of variable input will diminish
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8. IMPORTANT CONCEPTS
 Total physical product / total product (TPP/TP)
The total output or production that results from the combining
or transformation of factors of production
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 Average physical product / average product (APP/AP)
The output per unit of variable input or total physical product
divided by the quantity of variable factor
APP = TP/QL ; where QL is the amount of variable factor
 Marginal physical product / marginal product
(MPP/MP)
The additional output that can be produced by hiring one more
unit of variable factor; holding all other factors constant
MPP = TP/  QL 8

9. APL MPL The Law of Stage of
Land Labour TPL
(TP/L) (TP/L) Marginal Returns Production
1 1 3 3 -
The Law of
1 2 7 3.5 < 4 Increasing
Marginal Returns
1 3 33 11 < 26 Stage 1
1 4 50 12.5 < 17
1 5 65 13 < 15
The Law of
Diminishing
1 6 75 12.5 > 10
Marginal Returns
1 7 80 11.43 5 Stage 2
1 8 80 10 0
1 9 78 8.67 –2
Negative
Stage 3
Marginal Returns
1 10 72 7.2 –6
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10. TP(Q) d
Stage 1 Stage 2 Stage 3
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c
b
MPP/APP
b’
c’
APP
d’
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0 L1 L2 L3 L
MPP

11. RELATIONSHIP BETWEEN APPL AND MPPL
 MPPL between two points is equal to the slope of TP between these
two points
 MPPL rises at first as the slope of TP gets steeper
 MPPL reaches its maximum at point b where the slope of TPPL is the
steepest
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 After b’ or b, the diminishing marginal returns set in and MPPL falls as
TP becomes less steeper
 APPL at first rises and continues to rise as long as MPPL is greater than
APPL and APPL rises up to point c’
 Beyond c’ MPPL is below APPL. By adding more labors, output will
increase at decreasing rate which pulls the APPL down or the APPL fall
 Maximum TP is at point d where the slope of TP is zero or when MPPL is
zero
 Beyond d or d’, TP fall and MPPL is negative, APPL continues to fall but
with positive values.
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12. STAGES OF PRODUCTION
 There are three stages of production; stage 1, stage 2 and
stage 3
 Stage 1
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Stage 1 begins from point 0 to the point of intersection of
MP (marginal product) and AP (average product) curves.
 At this stage, there is sharp increase of total product (TP) as
we increase the units of labor employed.
 This is also means that each additional increase in labor
units will result in a greater increase of the TP.
A rational producer will continue to produce goods at this
stage as TP increase by increasing more labor
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13.  Stage 2
This stage begins from the intersection point of MP and AP
curves ( end of stage 1) until MP curve touches the horizontal
or x-axis. At this stage, the values of AP and MP are
decreasing. Note that the AP curve is always higher than the
MP curve, and when the MP curve touches the horizontal or x-
axis, the TP reaches its maximum point
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 This is the most efficient stage of production because the
combinations of variables and fixed inputs are used efficiently.
 A rational producer will want to produce at this stage of
production as the TP has already achieved its maximum point.
 However if he continues to produces beyond this stage, the TP
will start to decline.
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14.  Stage 3
 This stage begins when MP equals to zero and continues
to decline thereafter.
 A rational producer should not be producing at this stage
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of production because an increase in labor leads to
decline in the total product.
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BACK

15. Zulkhairi Nisa-Sg Petani Campus
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16.  Defined as the period where all inputs used are
variable inputs
 Firms use this period to plan their production by
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varying their inputs
 There are no fixed inputs in this period of production
 All input used are variables inputs
 Thus, in long run:
Q = f (Variable Inputs: land, labor, capital, entrepreneur) 16

17.  There are 4 factors of production in Islamic
perspectives
1. Land
Land is God’s gift which is invaluable to the life of mankind. Land is being used
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to exploit’s all the goods’ produce essential to man. Allah SWT created land to
remind mankind to protect and to make full use of it.
2. Labor
labor is an abstract effort and services sells to an employer for production
purposes. There are moral and ethic relationship between employee (labor)
and employer. This relationship is based on syariah. Reward to a labor is not
only in the form of wages but also a better return in the ‘Akhirat’ or hereafter.
3. Capital
The Islamic economic system is free from Riba due to the fact that it will cause
inflation, exploitation and so on.
4. Entrepreneur
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An entrepreneur is a person who plans the way and nature of work which is
able to come up with maximum productivity using the least cost possible
approach without neglecting the Islamic values and quality of production.

18. i) Producer’s objective is to attain maximum profit
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ii) Producer’s responsibility is to make all the
decisions about the organization like:
a. deciding what goods are going to be produced,
b. the best and the most efficient method of production
c. return from his efforts in the form of profit
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19. i) Among the producer objectives are:
a) To attain God’s pleasure
b) To bring peace to the Ummah
c) To attain maximum possible profit based on (a) and (b)
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ii) Producer’s responsibility are:
a) To combine all inputs with the lowest cost combination and increase
productivity to the maximum level
b) To ensure that any economic problem either internal or external of a
firm can be solved
c) To have sufficient market and to ensure stable price for all products
d) Understanding current economic situation
e) Ensure that all his industrial activities are not against the syariah
f) Thinking about the balance between material profit and society’s
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