The Theory of Production  Relationship between factors of production and the output of goods and services  How output changes when inputs change  Based on short run  Producers only change variable inputs  Long run  Period long enough for all inputs to vary

Law of Variable Proportions  Output will change as one input is varied  Other inputs are held constant  Examples  Preparing chili and adding more chili powder  Farming and using fertilizer  “too much of a good thing is a bad thing”

The Production Function  Illustrates the Law of Variable Proportions  Variable inputs horizontal  Total output vertical

The Production Function  Total Product  Total output produced by the firm  Marginal Product  Extra output generated by adding one more unit of variable input Number of Workers Total Product Marginal Product

Three Stages of Production  Stage I: Increasing Returns  Each input contributes more than the previous  Total output rises at a faster rate  Stage II: Diminishing Returns  Total production is growing  But by smaller amounts  Known as principle of diminishing returns  Stage III: Negative Returns  Total production is decreasing

Number of WorkersTotal ProductMarginal Product