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Chap 006

The document discusses production theory including the production function, marginal product, law of diminishing returns, average product, and returns to scale. It defines key terms like production function, marginal product, average product, constant returns to scale, increasing returns to scale, and decreasing returns to scale.

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Md. Zahid Hossan 1911877630
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23 views

Chap 006

The document discusses production theory including the production function, marginal product, law of diminishing returns, average product, and returns to scale. It defines key terms like production function, marginal product, average product, constant returns to scale, increasing returns to scale, and decreasing returns to scale.

Uploaded by

Md. Zahid Hossan 1911877630
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 6

Theory of Production
• Production Function: The production function specifies the
maximum output that can be produced with a given quantity of
inputs. It is defined for a given state of engineering and technical
knowledge .
• Marginal Product: The marginal product of an input is the extra
output produced by 1 additional unit of that input while other
inputs are held constant.
• Law of Diminishing Marginal Returns: Under the law of
diminishing returns, a firm will get less and less extra output
when it adds additional units of an input while holding other
inputs fixed. In other words, the marginal product of each unit of
input will decline as the amount of that input increases, holding
all other inputs constant.
• Average Product: Average product equals total output divided
by total units of input.
Returns to Scale
Returns to Scale: Diminishing returns and marginal products refer to the
response of output to an increase of a single input when all other inputs are held
constant.

Constant returns to scale: denote a case where a change in all inputs leads to a
proportional change in output. For example, if labor, land, capital, and other
inputs are doubled, then under constant returns to scale output would also
double.

Increasing returns to scale (also called economies of scale): Increasing


returns to scale arise when an increase in all inputs leads to a more-than-
proportional increase in the level of output.

Decreasing returns to scale: Decreasing returns to scale occur when a balanced


increase of all inputs leads to a less-than proportional increase in total output.

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