The Theory of Production
Main Idea

Key Terms

A change in the variable input called labor results in a change in production.

theory of production, short run, long run, Law of
Variable Proportions, production function, raw materials, total product, marginal product, stages of production, diminishing returns

Reading Strategy
Graphic Organizer As you read about production, complete a graphic organizer similar to the one below by listing what occurs during the three stages of production.
Stage I

Stage II

Stage III

Objectives
After studying this section, you will be able to:
1. Explain the theory of production.
2. Describe the three stages of production.

Applying Economic Concepts
Diminishing Returns Has the quality of your work ever declined because you worked too hard at something?
Sometimes you reach a stage where you still make progress but at a diminished rate.

W

Cover Story ss The Effects Are Getting Le
Special All the Time

s clares that digital effect
When George Lucas de t en adv e as profound as the are a technological advanc exactly right. . . . of sound and color, he is n But is the revolutio already over? w Mixed reaction to his ne
I:
de iso Ep rs Wa r movie, Sta sug ce, na Me tom an
The Ph the in gest that it may be, tions same way that revolu and or col ushered in by but is nd y log fou
New techno sound were pro all, er aft .
.
altering moviemaking.
.
brief affairs. and s vie mo the to en we go none of us is amazed wh go are we amazed when we r No ak. spe hear an actor
s.
age or im to the movies and see col is a effects-driven movies, for s, ate cre s thi
What
cas
Lu
returns. The more scale of diminishing e, com be we na, the smarter achieves in the digital are press. . . . the harder we are to im s, May 21,
—Philadelphia Daily New

122

1999

hether they are film producers of multimillion-dollar epics or small firms that market a single product, suppliers face a difficult task. Producing an economic good or service requires a combination of land, labor, capital, and entrepreneurs. The theory of production deals with the relationship between the factors of production and the output of goods and services.
The theory of production generally is based on the short run, a period of production that allows producers to change only the amount of the variable input called labor. This contrasts with the long run, a period of production long enough for producers to adjust the quantities of all their resources, including capital.
For example, Ford Motors hiring 300 extra workers for one of its plants is a short-run adjustment. If Ford builds a new factory, this is a long-run adjustment.

Law of Variable Proportions
The Law of Variable Proportions states that, in the short run, output will change as one input is varied while the others are held constant. Although the name of the law is probably new to you, the concept is not.

For example, if you are preparing a meal, you know that a little bit of salt will make the food taste better. A bit more may make it tastier still.
Yet, at some point, too much salt will ruin the meal. As the amount of the input—salt—varies, so does the output—the quality of the meal.
The Law of Variable Proportions deals with the relationship between the input of productive resources and the output of final products. The law helps answer the question: How is the output of the final product affected as more units of one variable input or resource are added to a fixed amount of other resources?
A farmer, for example, may have all the land, machines, workers, and other items needed to produce a crop. However, the farmer, may have some questions about the use of fertilizer. How will the crop yield be affected if different amounts of fertilizer are added to fixed amounts of the other inputs? In this case, the variable input is the fertilizer added per acre.
Of course, it is possible to vary all the inputs at the same time. The farmer may want to know what will happen to output if the fertilizer
and