Theory of Production (Terms only, No Graphs) Report in Econ101 2-CpE01 Economy & Finance Education College Economics 101

1. THEORY OF
PRODUCTION
2-CpE01

2. Production theory is the study of production, or
the economic process of converting inputs into
outputs.
Inputs Process Outputs
Resources Used
Production
Goods or
Services that
are produced

3. Types of Inputs
Variable Inputs
(Variable Factor)
• In the long run all factors of production
are varies according to the volume of
outputs
• Are those that do change with output,
which means more are employed when
production increases, and less when
production decreases.
• The cost of variable inputs is called
Variable Cost
• Example: Raw materials, labour, etc.
Fixed Inputs
(Fixed Factor)
• Remains constant
regardless of volume
• Fixed factors are those that
do not change as output is
increased or decreased,
• The cost of these inputs are
called Fixed Cost
• Example: Building, Land,
etc.

4. • Production uses resources to create
a good or service that is suitable for use, gift-giving
in a gift economy, or exchange in a market
economy.
• This can include.
1) Manufacturing
2) Construction
3) Storing
4) Shipping
5) Packaging

5. Law of Diminishing Return
This law is also known as the Law of
Diminishing Marginal Productivity.
The law states that when successive unit of
variable input (like fertilizers) used with a fixed
input (like 2 hectares of land)
beyond a certain point, the additional product
(output) produced by each additional unit of
variable input decreases.

6. Total Product (TP) – is the total amount produced during a
specified period of time by all of the factors
used in the production process.
Average Product (AP) – Ratio of total product and one
variable inputs.
Marginal Product (MP) – The rate of change of output as
result changes in one variable input
𝐴𝑃 =
𝑇𝑃
𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑖𝑛𝑝𝑢𝑡 𝑀𝑃 =
∆ 𝑇𝑃
∆ 𝑉
=
𝑇𝑃2 − 𝑇𝑃1
𝑉2 − 𝑉1

7. Classification of Length of Time in Production Process
Short run refers to a period of time in which
the quantity of machines and equipment
cannot change because of the time allotment,
yet long enough to make a change in its
variable.
Long run refers to a period of time which is
long enough for all the inputs to be changed
and varied. This is a case in which all inputs
are variable, and cost of production is likewise
variable.

8. Costs of the Firm – cost of Production or Economic Cost
• Total Fixed Cost (TFC)
- are those costs do not change as output increases. It is also
known as overhead or unavoidable cost. The expenses or
payments for fixed inputs are fixed costs.
• Total Variable Cost (TVC)
- are costs which business can control in the short run
by changing levels of production. These are costs that varies
directly as output changes.
• Total Cost (TC)
- The sum of Total Fixed Cost and Total Variable Costs at
each level of output. I is the sum total of cost of production which
include payments, like, wage and salary for labor, rent for land,
building and etc., interest for capital and normal profit for the
entrepreneur.

9. Other Costs
• Average Fixed Cost (AFC)
• Average Variable Cost (AVC)
• Average Total Cost (ATC)
• Marginal Cost (MC)
• Implicit Cost (IC)
• Explicit Cost
Go to
Definitions

10. PRODUCTION COST IN LONG
RUN
Long run is a period long enough for prices to adjust and also to
permit a firm or entrepreneur to alter all its resources on inputs
(both variable and fixed factors). The situation in the production
process of all factors of production are variable under this
period, some existin business establishments are dissolved,
while others find it favorable to organize and enter the industry

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13. Average Fixed Cost – defined as total fixed cost divided by output or
quantity.
Average Variable Cost – defined as total variable cost divided by
output or quantity. AVC declines initially reach a minimum and then
increase again.
Average Total Cost – defined as total cost divided by output, They
have to divide total cost by quantity in order to get the cost per unit.
Marginal Cost – is the extra or additional cost of producing one more
unit of output. MC can be attained for each additional unit of output b
knowing the change in total cost divided by change in output or
quantity
Implicit Cost – the cost of self-generated resources. A non-
expenditure cost. The factors used in production belong to the users.
Explicit Cost – the payment for non-owners of the firms. An
expenditure cost.