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Chapter 6: Production 6-1. Definition: It is an economic process that uses resources to create a commodity that is suitable for use by consumers. This process can include manufacturing, storing, shipping, and packaging. Because it is a flow concept, production is measured as a “rate of output per period of time”. 6-2. Factors of production: Factors of production are the resources used in the production of goods and services in economics. There are four factors of production: Land or natural resources, the payment for land is rent. Labor – human effort used in production, the payment for labor is a wage. Capital the payment for capital is called interest. entrepreneurs the payment for entrepreneurs called profit. 6-3.Production Function There are several ways of specifying the production function. In a general mathematical form, a production function can be expressed as: Q = f(X1,X2,X3,...,Xn) where: Q = quantity of output X1,X2,X3,...,Xn = factor inputs (such as capital, labour, land or raw materials). One formulation is as a linear function: Q = a + bX1 + cX2 + dX3,... where a,b,c, and d are parameters that are determined empirically. Another is as a Cobb-Douglas production function (multiplicative): 6-4.The production function as a graph Any of these equations can be designed on a graph. A typical production function is shown in the following diagram. Q A B c Q=f(x1,x2,x3) t Stage 1 stage 2 stage 3 Through points A and B the production function is rising, indicating that as additional units of inputs are used, the quantity of outputs also increases. Beyond point C, the employment of additional units of inputs produces no additional outputs, in fact, total output starts to decline. 6-5. The stages of production: To simplify the understanding of a production function, it is common to divide its range into 3 stages. In Stage 1 (from the starting point to point B) the variable input is being used with increasing efficiency reaching at point B . In Stage 2,(from point B to point C) output increases at a decreasing rate. In Stage 3,(from point C to point D) output is being decreases and the production after point D must be stopped .