1. Chapter 5, Section 2 The Theory of Production

2. Production Theory of production = relationship between the factors of production and output of goods and services Theory of production = relationship between the factors of production and output of goods and services The difference between short run and long run The difference between short run and long run

3. Law of Variable Proportions In the short run, output will change as one input is varied while the others are held constant In the short run, output will change as one input is varied while the others are held constant Relationship between the input of resources and output of the final product Relationship between the input of resources and output of the final product

4. Production Function (Page 124, Figure 5.5) Relationship between changes in output Relationship between changes in output Production schedule = figure lists hypothetical output as the number of workers varies from zero to 12 Production schedule = figure lists hypothetical output as the number of workers varies from zero to 12

5. Total Product Total output produced by a firm Total output produced by a firm Plant is barely operating and has 1-2 workers, resources sit idle Plant is barely operating and has 1-2 workers, resources sit idle Rise in total product = additional workers added means a rise in total product Rise in total product = additional workers added means a rise in total product Total Product Slows = as more workers are added production slows Total Product Slows = as more workers are added production slows

6. Marginal Product The extra output/change in total product caused by the addition of one more unit of variable input The extra output/change in total product caused by the addition of one more unit of variable input

7. Stages of Production Based on the way marginal product changes as the variable input of labor is changed Based on the way marginal product changes as the variable input of labor is changed Law of Diminishing Returns Law of Diminishing Returns –Stage 1 (Increasing Returns) –Stage 2 (Diminishing Returns) –Stage 3 (Negative Returns)