Supply - Part 2

In order to supply a product, a combination of land, labor, capital, and entreprenurs must come together. This combination between the factors of production and the output of goods and services is addressed by the theory of production.

The theory of production is usually divided into periods known as the short run and long run. In the short run, it is assumed that this period allows only the change in the variable known as labor, while the long run allows producers to change quantities of all of their resources (building new factories, producing new product lines, large-scale retraining, etc.).

When the quantity of inputs are varied, outputs should change. However, if a truly scientific analysis is to occur, there can be only one variable. The law of variable proportions addresses this. While the change in output must be measured from a singular variation of input, this provides an incomplete picture. In order to make the most accurate decisions, individual changes  must be analyzed and their results combined to provide a possible spectrum of possible consequences.

Using the data (change of inputs & resulting output) a production schedule can be created. This schedule clearly displays the three stages of production.

• Stage 1 - Increasing returns
• Stage 2 - Decreasing returns
• Stage 3 - Negative returns

The Theory of Production explained

Practice problem - Production Function

Objectives:

• Explain the theory of production
• Descrube the three stages of production

Homework: Read 5-3 and find an article/summary regarding supply (due Thursday the 19th).