Sie sind auf Seite 1von 2

Chapter 6: Production and Business Organization

Economics, 18th Edition (Samuel Nordhaus)

Theory of Production and Marginal Products

The Production Function
 Input – land , labor
 Output – wheat, toothpaste

If you have a fixed amount of inputs, how much outputs can you get?
In practice, the answer depends on the state of technology and engineering knowledge.

 Production Function
o The relationship between the amount of input required and the amount of output that
can be obtained
o Specifies the maximum output that can be produced with a given quantity of inputs
o Defined for a given state of engineering and technical knowledge
o There are literally millions of different production functions--- one for each and every
product or service. Most of them are not written down but are in people’s minds.
o In areas of the economy where technology is changing rapidly, production functions
may become obsolete soon after they are used. And some (like the blueprints of a
medical laboratory) are specifically designed for a specific location or purpose and
would be useless anywhere else. Nevertheless, the concept of a production function is a
useful way of describing the productive capabilities of a firm

Total, Average and Marginal Product

 Total Product – total amount of outputs produced
 Marginal Product – (of an input) the extra output produced by one additional unit of that input
while other factors are held constant
 Average Product – total output divided by total units of input

The Law of Diminishing Returns: holds that we will get less and less extra output when we add additional
doses of an input while holding other inputs fixed.
 The marginal product of each unit of input will decline as the amount of that input increases,
holding all other inputs constant.
 A widely observed empirical regularity rather than a universal truth

Note: Diminishing returns and Marginal Products refer to the response of output to an increase of a single
input when all other inputs are held constant.

Returns to Scale – the effects of scale increases of inputs on the quantity produced.
 Three Important Cases:
1. Constant Returns to Scale
o denote a case where a change in all inputs leads to a proportional change in
o Example: if labor, land, capital and other inputs are doubled, then under
constant returns to scale output would also double.
2. Increasing Returns to Scale
o also called economics of scale
o arise when an increase in all inputs leads to a more-than-proportional increase
in the level of output.
o Example: an engineer planning a small-scale chemical plant will generally find
that increasing the inputs of labor, capital and materials by 10% will increase
the total output by more than 10%.
3. Decreasing Returns to Scale
o Occur when a balanced increase of all inputs leads to a less-than-proportional
increase in total output.

Chapter 6: Production and Business Organization
Economics, 18th Edition (Samuel Nordhaus)


• Production requires not only labor and land but also time.
• To account for the role of time in production and costs, we distinguished between two different
time periods:
 Short Run – period in which a firm can adjust production by changing variable factors
(i.e., materials & labor) but cannot change fixed factors (i.e., capital)
 Long Run – period sufficiently long that all factors including capital can be adjusted.
• Two different time periods in production and cost analysis:
 Short Run – period of time in which some inputs (the variable inputs) can be adjusted
 Long Run – period in which all factors employed by the firm (including the capital) can
be changed

• Much of the increase in output has come from technological change, which improves
productivity and raises living standards.
o Process Innovation – occurs when new engineering knowledge improves production
techniques for existing products
o Product Innovation – new or improved products are introduced in the market place


• Productivity – a concept measuring the ratio of total output to a weighted average of inputs.
o Labor Productivity – calculates the amount of output per unit of labor
o Total factor productivity – measures output per unit of total inputs (typically of capital
and labor)
• Productivity grows because of economies of scale and because of technological change.
o While technology might ideally allow constant or increasing returns to scale, the need
for management and supervision may eventually lead to decreasing returns to scale in
giant firms.
• Aggregate Production Function – relate total output to the quantity of inputs (like labor, capital,
and land) and to total productivity

Business Organizations
• Business firms are specialized organizations devoted to managing the production of production.
Among their important functions are exploiting economies of mass production, raising funds,
and organizing factors of production.


• The Individual Proprietorship: classic small businesses often called “mom-and-pop stores”;
might do a few hundred dollars of business per day and barely provide a minimum wage for the
owner’s efforts.
• The Partnership: combination of talents. Partnerships pose disadvantages that make them
impractical for large businesses.
o The major disadvantage is unlimited liability. General partners are liable without limit for
all debts contracted by the partnership.
• The Corporation: a separate legal entity that may on its own behalf buy, sell, borrow money,
produce goods and services, and enter into contracts.