Economics and the Theory of Production

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For economists, the theory of production concerns what firms use to allocate inputs so the quantity of goods (output) is optimized, maximizing profits. Production theory is a branch of microeconomics--the study of consumers and firms.

Theories/Speculation

Mainstream economic theory assumes that firms seek to maximize profits. Production theory, then, asks what combination of inputs (known as factors of production) will generate the quantity of output that yields maximum profit.

Identification

Factors of production include land, labor and capital. The latter category consists of a firm’s facilities, machinery and other goods used in the production process.

Types

Some economists group factors of production into more specific categories. These categories include land, capital goods, raw materials, human capital (labor), and entrepreneurship.

Efficiency

A production process is efficient if the resulting quantity of output is the highest level possible. It is inefficient if fewer factors can produce the same quantity of goods.

Function

Economists use a mathematical equation model known as a production function to study production empirically. The production function models output as a function of various levels of inputs.

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References

  • Principles of Economics (3rd edition), N. Gregory Mankiw, 2003
  • Microeconomics: Theory and Applications, Edwin Mansfield, 1994
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