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 .