Lesson 6 the Theory of Firm: Production
Cost
Production, Inputs and Outputs
Production is the process of
converting inputs and outputs
Inputs are commodities and services
that are used to produce goods and
services
Outputs are the various useful goods
and services that result from the
production process and either
consumed or employed in further
production
Two Main Types of Production Inputs
1. Fixed Inputs
Is any resource the quantity of
which cannot readily be changed
when market conditions indicate
that a change in output is desirable.
These cannot easily be change
within a short period of time when
there is a need to immediately
increase (decrease) the production
level, and thus, they must remain as
fixed amounts while managers
decide to vary output.
2. Variable Input
Any economic resource the quantity
of which can be easily changed in
reaction to changes in output level
Final Goods
Goods and services that are
ultimately consumed
Intermediate Goods
Goods that are used to produce
other goods.
Technology: Labor intensive or Capital
intensive
An economy or firm uses its existing
technology to combine inputs to
produce outputs
Technology
Is a body of knowledge applied to
how goods are produced
It is the production process
employed by firms in creating goods
and services
Labor Intensive Technology
Utilizes more labor resources than
capital resources
Usually employed by economies
where labor resources are abundant
and cheap.
Capital Intensive Technology
It utilizes more capital resources
than labor resources in the
production process.
Employed by industrialized
economies since capital resources in
this economies are cheaper than
labor.
Short run versus Long run
Short run concept is the period of
time so short that there is at least
one fixed input, therefore changes
in the output level must be
accomplished exclusively by changes
in the use of variable inputs.
Long run is a period of time so long
that all inputs are considered
