Production theory supply

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Production theory supply

In this chapter, we continue our exploration of neoclassical microeconomics by introducing the traditional approach to producer decisions. In a sense, you already know the conclusion of this story. It ends with the supply curve that you already mastered earlier. The primary goal of this chapter is to explain the assumptions underlying the individual firm`s supplycurve. This chapter investigates and analyzes the relationship between the different factors of production. Understanding production and the costs of production (introduced in the next chapter) are important in understanding, predicting, and explaining producer decision making. Next, the chapter presents a brief critique of the neoclassical notion of production. In the appendix to this chapter, alittle algebra is used to demonstrate the concepts introduced to explain production.


After reading and studying this chapter, you should be able to:

• Describe inputs into production and use the production function to illustrate the relationships among factors of production and technology.

• Explain the difference between production in the short run andproduction in the long run.

• Describe challenges faced by U.S. businesses as they make production decisions.

• Discuss the critiques of the neoclassical notion of production and factors of production.


When Henry ford first started producing automobiles, most of his employees were skilled crafts people. He could not hire workers to just “tighten bolts” on theassembly line because the parts that went into the early Fords were not standardized. It took skill, time, and money to shape individual parts so that everything fit together. But ford was an innovator. When he convinced his engineers to find a way to produce standardized parts, the wildly successful and inexpensive model T was born. Ford’s mass-production factory system transformed the face ofsociety and the structure of business. He changed the production process from one that employed skilled workers using inexpensive tools and machines to one that combined unskilled workers with expensive and specialized machines. His engineers saw that this was possible, and ford saw that it would be profitable. Today, human innovations and technological breakthroughs continue to reshape the world ofwork. Breakthroughs in communications, biotechnology. And other areas are rapidly changing how work and where we work.

As the first step in analyzing production, we introduce a production function. A production function describes the connection between the factors of production and output. Traditional economics recognizes four broad categories of factors of production: land (or naturalresources), labor, capital, and entrepreneurship. The factors of production are inputs into the production process. The owner of a firm, the entrepreneur, takes his or her idea, use technology to combine the other factors of production, and produces a good or service to sell in the market. Therefore, a production function is just a statement, a kind of shorthand, of the relationship between the inputs andoutput. To make the production function manageable, we focus on capital, the plants and equipment used to make goods and services, and labor. Labor consists of the human beings that produce the good or service. Entrepreneurship and natural resources do not appear specifically but are present in the background. In general, the production function is:



Q= total production of the firm

a= technology used to combine the factors of production

L= labor

K= capital (machinery)

The equation is a shorthand way of saying the output of the firm (Q) is a function (F) of capital (K) and labor (L) that are combined in a particular way (a).

Analysis is divided into production in the short run and long. The...
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