Theory of Production? Essay

270 Words2 Pages
What is meant by Theory of production? Theory of production, in economics, an effort to explain the principles by which a business firm decides how much of each commodity that it sells (its “outputs” or “products”) it will produce, and how much of each kind of labour, raw material, fixed capital good, etc., that it employs (its “inputs” or “factors of production”) it will use. The theory involves some of the most fundamental principles of economics. These include the relationship between the prices of commodities and the prices (or wages or rents) of the productive factors used to produce them and also the relationships between the prices of commodities and productive factors, on the one hand, and the quantities of these commodities and productive factors that are produced or used, on the other. Production function presumes the following main features: 1. It indicates a functional relationship between physical inputs and physical output of a firm. 2. The production function is always in relation to a period of time. 3. The production function can specify either the maximum output that can be produced from a given set of inputs or the minimum quantity of inputs required to produce a given level of output. 4. Production function is purely a technical relationship. It has no reference to money price. 5. Output in the production function is the result of joint use of factors of production. 6. The production function includes all the technically efficient methods of production. Thus production function describes the law of production, i.e the transformation of factor inputs into outputs (products) at any particular period of

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