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In this section, the entire supply side and the characteristics and analysis of the producers are in account with production. Production starts from the input to the output level which depends on the consumer’s behavior.

Let us consider the theory of the firm, with various characteristics such as cost- minimizing production decision and the cost variation which depends on the output. At the end of this section, we can come to a conclusion about the features of market supply.

Consider a company like General Motors and look into it with various questions for the market supply.

  • How much production line equipment should be implemented for the new plant?
  • How many labors have to be assigned for each section?
  • How to increase the production rate?
  • How many new employees should be hired?
  • How will the cost change based on the time and the level of the production?

These questions will be applicable to all the firms and even to the non-profit organizations.

The Production Decisions of a Firm

The production decisions of companies can be unstated in three simple stages which are similar to the purchase decision of the consumers. The steps are described below

  • Production Technology
    • The practical way of describing the inputs into a meaningful output as a complete product as Cars, Television,,
    • The direct point is that if the firm has to manufacture 10000 television per month by the help of labors manually or with the help of highly automated robotic machines with less number of workers
  • Cost Constraints
    • The capital investment and the labor cost and another constraint for the input are considered.
    • The cost of production is the main constraint for any firm, and it depends on the production of the product such as Television.
    • It mainly focuses to reduce the cost of production of the product with the input usage cost.
  • Input Choices
    • How much of the input is used for producing the output is the input choice, which is to be decided by the firm?
    • Consider a country in which the electronic firm has low wage rates, and then the production can be done with more labors with very less capital investment.

The theory of the firm is discussed with the help of three steps based on the consumers. Now other important factors to be considered to take a note of firms behavior is listed based on the assumption.

  • If a firm uses cost minimization of inputs on various combinations, then the total production cost and the quantity varies to produce maximum profit.
  • Production technology is transformed into production function based on some factors as
    • How to convert the input into a productive output of a firm?
    • How the output changes when the input of one characteristic is changed and fix other input as fixed.
    • How output changes based on the varying all the input characters of the firm and to produce output?
    • All factors are implemented and tested in a firm to increase the productive scale of the firm.

Other factors about productions are discussed briefly in the below subsections.

6.1 Firms and Their Production Decisions

Firms in a latter 19th century are new today and which has new inventions. Before the 1800s all productions are handled and produced by the farmers, craftsman and other individuals who produce and deliver through merchants and other traders, to whom they sell various goods.

Imagine if there is no firm for production of automobiles, does it feel weird. Maybe yes we can’t imagine automobile industry without some large companies as Ford and Toyota. Similarly, all sectors have some large company to take place in high production from food to aeronautics. If you have any idea that we don’t want a firm, a similar question is raised by Ronald Coase in 1937 and wrote a post and the title was “What is the requirement of companies when the market itself is excellent at distributing resources?”

Why Do Firms Exist?

Here goes the assumption if we need companies to manufacture vehicles?  Then why one should we depend on the general motor? Why couldn’t cars be manufcatured through a group of individuals? Why people can’t share works as letting me design, let me buy steel, etc.,

Similarly, a group of authors could write the book and produce the books directly to the students at a negotiable price. Why should we depend on universities, schools and overrated fees?

For the production of a car starting with the design, type of material that is to be used In the interior and exterior are to be analysed. The design and the material used are directly proportional to one another. The weight of the material and the design should be synchronized. One part fails and reorganizing from the design material should be started from the first part obviously. It requires many individuals to produce a car, and the cost of negotiation may occur and when comes to redesigning the entire part should change with the renegotiation of the price and the fee for each.

The quality and the cost of production to produce a car will be huge, and the process is complex to be executed.

The main part of the firm is decision making power and the coordination between each section and within the workers is the strength of the firm. To get desired output, they could change the design and manufacturing style as essentially needed. But it is a one-time salary managed the system and it does not require renegotiating for each work done by the worker. Managers direct the workers what part of work to be done? And when the work is to be done? Are managed periodically it is not sure that all firm run successfully. There is some inefficient operating system that managers cannot monitor the workers all the time. In some cases, managers themselves make some mistakes by their interest. In some cases, the theory of firm fails as a broad result in the organizational economics.

Finally, the point is firm can produce goods more managerially and effectively with good service, and it would be impossible without their part.

The Technology of Production

The purpose of the firm is mentioned above that it coordinates the management with a large number of employees and administrators. On the other hand the purpose is still not clear.

We know that the main objective of the firm is to transform the input into desired output effectively. For this production, process firm uses various steps to proceed with the transformation into an efficient output. Any processor input which adds up to the production of the product is known as factors of production.

Consider any business process and the inputs can be broadly classified based on their role as Technical and nontechnical. Based on the working platform it can be classified directly into labors, materials and the capital. For a bakery the labors, raw materials and oven, and equipment that are required to produce the optimal output as a bread or cake.

Now broad classification is subdivided into a narrow subdivision as skilled and non-skilled as engineers and agricultural workers. The materials that are required as steel, plastic, water and other factors are used as a technological factor. Capital includes land, building, and other equipment.

The Production Function

To make the manufacture system to be simple let us use two variable inputs as labor (L) and capital (K). Firm uses various factors for production function as inputs, the basic conversion of input into the output in different forms of ways that too through the usage of different  combination as labors, material, and capital the production function with L and K is represented as follows,

q = F(K,L)

The above equation states two inputs like capital and labor. It is very essential to consider the fact that both results and the input given for the same is the main flow. The quantity of labor, capital, used every year is the sum total of produce manufactured each year.

When each possibility of input operates efficiently as possible for various inputs, the technical efficiency is always considered by all profit-seeking firms, and they will not waste the resources.

Difference between the Short Run and the Long Run

In planning and building up of a new factory the inputs to produce the product with the different quantity of labor a long with the capital which takes about a year or more. The inputs that are added and the result for a particular period is considered to substitute the capital for labor.

For a firm, it is not only important on which input variation the firm runs, and it is also dependent on the time or period. Whether it is a short run or long run for the production analysis?  Then the period is the Short run, fixed input, and Long run.

In Short run, one or more input variables cannot be varied at least one variable cannot be varied. This invariable factor is known as fixed input. The amount of time required for all the factors to be an input variable then the factor is Long run. It short runs the subdivisions of factors that are narrow are varied and in Long run broad classification is varied.

We do not take some specific time between Short run and Long run as one year it depends on the firm to vary some inputs and to diminish the manufacturing cost. Consider capital as fixed input and work force as avariable.

6.2 Production with One Variable Input (Labor)

Labor is variable, and the capital is fixed, for the firm to produce more output by increasing the labor input. Consider a firm that has more automated machines and less number of labors, where the management get to choose the output q to increase as the labor L increases or vice versa. The table below which shows the production with one variable input for labor is shown.

Average and Marginal Products

The average and marginal products are described based on the labor. The fourth column is showing the APL which can also be stated as average of product for labour or employees and it is also the output unit of employee unit.


Amount   of Labor (L) Amount of Capital (K) Total Output (q) Average Product (q/L) Marginal Product (∆q/∆L)
0 10 0
1 10 10 10 10
2 10 30 15 20
3 10 60 20 30
4 10 80 20 20
5 10 95 19 15
6 10 108 18 13
7 10 112 16 4
8 10 112 14 0
9 10 108 12 -4
10 10 100 10 -8

The average of the product is deliberated by separating the entire output q by the total input of labor L. By the average production we can measure the labor’s workforce regarding output from each worker produced as an average. In the above table, the labors average product upsurges primarily but drop when the input is <4.

The marginal product of labor (MPL) which shows the additional output manufactured by each labor.

Average product of Labor = output/labor input = q/L

Marginal product of Labor = change in output / change in labor input

= ∆q/∆L

The Law Diminishing Marginal Returns

The input increases as the state increase evenly in the result in which the output decreases. When the labor is small where the input of the capital is fixed then the output decreases. In some cases, workers may be ineffective as a result the marginal product of labor diminish.

The law diminishing applies to the marginal returns, and it is basically for the short run when the single input is fixed. It is also applicable for the long run. The inputs are the variables, and a person as a manager is assigned to analyse the production, where choices for one or more than one remains unaffected.

The labors with high quality are rented initially, and lease at last by this returns with a possible change in the eminence of the work force inputs are maximised. All the labors with equal quality results in a limitation of fixed inputs for the worker quality.

The Effect of Technological Improvement

Output per

Time period

Production 1” = C

The effect of technology from o1 to o3 increases gradually as the process continues and the shift increases. Where the agricultural and technological field increases, as the pesticides and other technological factor allows the growth.

A Production Function for Health Care

In the recent years, 15% of GDP is spent on health care which is increasing rapidly in many developed countries as the United States and even in developing countries. France spends 11%, and Germany spends 8% of its substantial resources to health care.

Let us see if the production process increases as the expenditure for the health care increases or the inefficient production is reflected.

Production 2” = C

The above figure shows the production function for health care in the United States. The vertical line of the axis is health output, and the horizontal line is the average increase of the lifespan. The average of thousand dollars spent on health care is in a horizontal line for the hospital equipment and drugs.

The maximum achievable point for the health outcome for the whole population and dollar spent is mentioned in the points as A, B, C which is the inputs in which the effectiveness for the possible output is calculated. Think about the point D which is inefficient in the production function and the maximum possible health output.

Starting at the point A the expenditure on health care is increased as by $20000 from $10000 to $30000 which also increases the life expectancy. Now let us see why the United States spend more on health- care, As we know that the United States is relative wealth and thus the shift towards the health increases and the life expectancy also increases.

It can otherwise state as the United States healthcare is inefficient, where higher output can be achieved through the same or similar expenditure made by the United States. Thus the point D to B which does not have any additional life expectancy for one year by using inputs more efficiently.

From the above two explanations that are stated has some valid points and the state with inefficiency in the health-care production is likely the U.S income grow where people tend to spend more on the health-care, and the incremental benefits will be limited.


The economist Thomas Malthus (1766-1834) believed that the words limited land could not supply enough food as the population grew higher and higher. In this, he predicted that the average and marginal labor productivity increases and the need for food and starvation would be the result, as he was wrong.


1948-52 100
1961 115
1965 119
1970 124
1975 125
1980 127
1985 134
1990 135
1995 135
2000 144
2005 151
2009 155

The technological improvements have dramatically altered the food production in many countries as a developing country in India. Thus the average product of labor and the total food output have increased. The cereal yield is increased steadily over a period, as the agricultural productivity increases the food supplies from the growth in demand and price.

The distribution of food from high volume production area to the low production area takes more time, and the low income of redistribution makes the agriculture surplus.

Labour Productivity

For the real standard of living, the citizens of the countries should deal with the labor productivity as most of the time microeconomics deals with the labor productivity.


In a year the total value of goods, the sum total of the services generated by an economy is equivalent to the payment made for the standard living. Consumers ultimately receive the wages, salaries and the interest of payment along with the feasting in the long run only by maximising the overall production or amount produced.

The quantity of the capital accessible just for the use in production is the stock of capital, and the important source is the alteration in the productivity, and the growth of the labor is technological change. The expansion of latest technology allows the labor to be more effective and to produce high-quality goods.


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