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Chapter 6: Production Theory

Chapter 6: Production Theory

pp. 269-319

Authors

, Richmond, The American International University in London
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Summary

This topic examines relationships between inputs and outputs in the production process. The starting point is the explanation of various concepts that are fundamental in production and costs: factors of production, fixed and variable factors, short and long run, scale, productivity and efficiency. The increasing importance of intangible factors is discussed, along with their main features of scalability, sunkenness, spillover effects and synergy. Production functions can take various mathematical forms. The significance of average and marginal product is explained. The concepts of the law of diminishing returns, isoquants, economies of scale, diseconomies of scale and returns to scale are introduced and interpreted. The determination of the optimal use of factors of production is explained, using mathematical analysis. Case studies play an important role in this topic in terms of demonstrating the application of theoretical concepts to real-life situations, particularly in a digital age where intangible assets and network effects are important. The leading case study relates to the so-called ‘productivity puzzle’, and various explanations of the puzzle are presented.

Keywords

  • Inputs-output tables
  • factors of production
  • intangible factors
  • productivity
  • efficiency
  • short run
  • long run
  • economies and diseconomies of scale
  • law of diminishing returns
  • production functions

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