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Production Theory

These pages discuss production theory. Each economic concept (and there are several concepts embedded in production theory) reflects the underlying reality of diminishing marginal productivity.
Production Function
The economic concepts of Total Physical Product (TPP), Average Physical Product (APP), Marginal Physical Product (MPP), and the Stages of the Production Function
Profit Maximizing - input
The economic concepts of Value of Total Product (VTP), Value of Average Product (VAP), Marginal Value Product (MVP), Marginal Input Cost (MIC), and Profit Maximizing Level of Variable Input
Demand for Input
The marginal value product indicates the firm's demand for its variable input.
Determining Cost
The business goal is to maximize profit, that is, maximize the difference between total revenue and total cost. Accordingly, the manager must be able to convert the information about quantity of input to value or cost of input.
Profit Maximizing - output
A manager maximizes profit when the value of the last unit of product (marginal revenue) equals the cost of producing the last unit of production (marginal cost).
Numeric Example
This page offers hypothetical data to help illustrate the production theory concepts described in this folder.
Supply of Output
The firm's supply of output is revealed from the firm's marginal cost curve.
Loss Minimization
Firms will not immediately stop production if the firm becomes unprofitable. As long as the loss is less by operating than by stopping production the firm will continue to produce even though it is incurring a loss; that is, total revenue is greater than total variable cost, but total revenue is less than total cost. The firm will discontinue production if total revenue drops below total variable cost, or if fixed inputs become variable inputs with the passage of time.
How to Produce
A firm can produce its output by using a variety of inputs; which inputs should the firm use?
What to Produce
A firm can produce a variety of products or output from its inputs; which products should the firm produce from its inputs or economic resources?
Summary & Applications
Can we simplify our explanation and enhance our understanding of these economic concepts so we are better prepared to apply these economic concepts in our decision making?
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