Theory of Productivity-relationship between factors of
production & the output of goods & services
• Short run-period in production that allows producers to adjust only
one variable (labor)
• Long run-period in production that allows producers to adjust all of
the other resources
Considerations by producers
1) Productivity-the amount of goods and services
produced per unit of input
2) Costs
Productivity
• Companies calculate output in order to understand how it is affected
by changes in input
• Total product (output)-all the product a company makes with a given
amount of input during a given period of time
• Marginal product-the change in output generated by adding one
more unit of input
LAW OF DIMINISHING RETURNS/VARIABLE
PROPORTION
0
0
0
1
10
10
2
50
40
3
110
60
4
175
65
5
245
70
6
320
75
7
400
80
8
485
85
9
575
90
10
675
100
11
875
200
12
985
110
13
1,000
15
14
975
-25
15
925
-50
16
825
-100
Stage I/Increasing Marginal returns
Marginal Product
Stage II-DMR
Total Product
Stage III- NMR
Labor Input
Measures of Cost of Production/Inputs
• Fixed Costs-costs of production that do not change ie. Loans, rents,
salaries (includes depreciation-lessening in value on capital goods)
• Variable Costs-costs of production that changes as the level of output
changes ie. Raw material, wages
• Total Costs- the sum of the fixed and variable costs of a company
• Marginal cost-additional cost of producing one more unit of output
(additional cost/number of additional units)