THE PRODUCTION THEORY

Definition of production concept

(i) Production:- this is the creation of goods and services through the transformation

of inputs into outputs.

(ii) Inputs:- these are the ingredients used by a firm to produce a good or service.

Sometimes they are called factors of production or resources. These include land,

capital, labour, entrepreneurs etc.

(iii) Output:- this is the end product of transforming input into goods or services.

Output is thus a function of the various input expressed in the production

function.

(iv) Production function:- a production function is a schedule (or table, or

mathematical equation) showing the maximum amount of output that can be

produced from any specified combination of inputs, given the existing

technology.

In short the production function is like a “recipe book” showing what output are

associated with which combination of inputs.

It may be represented as follows

Q  f K, L,r

Where :