CHAPTER 29
Production Theory
Supply
LEARNING OBJECTIVES
Describe inputs into production and use the production function to illustrate the
relationships among factors of production and technology.
OUTLINE OF CHAPTER
I. The Production Function
II. Production in the Short Run: The Law of Diminishing Returns
V. Summary
KEY TERMS
constant returns to scale
occurs if output increases by the same proportion as all inputs, e.g., a tripling of inputs leads to
a tripling of output
decreasing returns to scale
occurs when output increases by less than inputs; for example if inputs triple but output only
doubles
mass production
a system of production in quantity using standardized parts, task-specific capital, and unskilled
labor
process technology
the application of knowledge for producing products as efficiently as possible
product technology
the application of knowledge to create new goods and/or services
ANSWERS TO END OF CHAPTER REVIEW QUESTIONS
Describe inputs into production and use the production function to illustrate the
relationships among factors of production and technology.
1. List the four broad categories of factors of production or inputs to production.
How are they represented in a production function?
2. What is the role of technology in production?
Explain the difference between production in the short run and production in the long run.
3. What is the difference between the short-run and long-run? Is there a fixed time period
associated with short-run and long-run? Explain why or why not.
4. What happens to output in the short-run as production increases? What inputs are
-run? How does this explain diminishing
marginal productivity?
Labor is variable in the short run. Capital is fixed. Output will eventually increase at a
5. What might happen to output in the long-run as the number of inputs is increased? Are
there any fixed inputs in the long-run?
Describe challenges faced by U.S. businesses as they make production decisions.
6. Compare and contrast product technology and process technology.
7. Describe how a competitive advantage can erode over time.
Discuss the critiques of the neoclassical notion of production and factors of production.
8. Compare and contrast the traditional and progressive view of labor as an input into –
production.
Labor input is not a machine, it is a human being. The intensity or speed of work
9. What are the issues raised about the traditional treatment of technology in production?
Modern technology may greatly reduce the impact of the assumption of diminishing
APPENDIX 29.1
The Relationship between Total, Average, and Marginal Product
LEARNING OBJECTIVES FOR APPENDIX 29.1
Calculate various measures of productivity and explain what they mean.
OUTLINE OF APPENDIX
I. Production in the Short Run
Graphical Analysis
The Relationship between Total, Average, and Marginal Product
KEY TERMS
average product of labor
a measure calculated by dividing total output by the number of variable inputs
capital/labor ratio
refers to the mount of machinery used in a production process relative to the number of workers.
diminishing marginal productivity
output per worker because of specialization
ANSWERS TO APPENDIX 29.1 REVIEW QUESTIONS
Calculate various measures of productivity and explain what they mean.
1. Explain in words what the marginal productivity of labor and average productivity of
labor measures and why this is important information for the owner of a business.
2. Why does marginal productivity rise and then fall in the short-run?
Marginal productivity will initially rise as workers are added to the fixed capital inputs.
Understand the relationships of the measures of productivity.
3. Explain why diminishing marginal productivity eventually causes average productivity to
fall.
4. Sketch a graph of marginal productivity and average productivity. Label the point where
MP = 0 and AP = 0.
Explain diminishing marginal productivity and how it is measured.
5. Why do the additions to output fall after a certain number of workers in the short-run
Diminishing marginal productivity means that each additional worker has less and less
6. al
productivity curve are we referring to? What does that mean?