The business firm is basically termed as a technical unit where the inputs are converted into outputs and then into a sale. In the long run, it is essential for having a better understanding of the marginal return received on the marginal product. A secured relationship between all the physical outputs of the production process and its input constitutes the production function theory (Foray,2004). A firm product function shows the relationship between amounts of resources employed and total product.
A production process minimizes the waste and brings out the product in the market in the most effective manner. The economic growth of any country largely depends on the manufacturing growth implies a country manufacturing growth should be high if it has high economic growth. With this inception, the theory of production function determines the income generated by the production process is the economic physical input value deducted from the economic value of physical output. In this blog, we are going to discuss the stages of production in economics along with try to determine the elasticity of the production.
Fixed And Variable Resources-
Resources such as labour are categorized as variable resources because they can be varied quickly and have the ability to change the output range, whereas the adjustment in these resources consumes much more time. On the other side, resources such as the size of the building can’t be altered quickly so they fall under the category of fixed resources (Ganat,2020). Output generated from the production process varied as per time required to change the quantity. As opined by assignment helper, in the short run, at least one resource are fixed contradictory no resources are fixed in long run projects.
So the output can be changed just by adjusting the resources as the size and firm are stable in short-run cases. The length of the long run projects differs greatly because of the production efforts.
The Law Of Diminishing Marginal Returns
As accepted by economist, there are significant stages of production under which all the production process is defined by the law of diminishing marginal returns (Mindlinet.al, 2016).
A law of diminishing marginal returns predicts when some optimal capacity is already achieved then the additional factor added to the production actually responsible for smaller increases in the output. For instance, if a company employs workers to achieve the optimal capacity, and when it achieves, then even after adding additional employees the optimal level will also result in less efficient operations.
Henceforth, the law of diminishing marginal returns can be considered as the most important feature in short-run projects
Figure 1 illustrates the relationship between marginal and average productivity using specified data. It has been noted when the marginal returns are increasing, marginal product in the panel also tend to increase. But once marginal returns set in, the marginal product also declines. It has also examined by the data the total product also tends to increases but at a decreasing rate.
Henceforth as long as the marginal product is leading in a positive direction, the total product is also increasing.
The Three Stages Of Production Process-
Now we are going to further discuss stages of production for short-run production function-
Stage 1– this stage extended with zero input of variable factor to the level of input where it has been analyzed the average product is maximum. As said by economic assignment writer, the fixed factor under this stage is excessive. Similarly, the output can be increased via increasing variable input relative to a fixed input. For instance, in a company, if one worker can produce 5 crafts, then together two employees can produce 15 crafts. At this stage, the elasticity curve also found to be greater than unity as marginal productivity is greater than average productivity. Hence it can be deduced, one per cent change in inputs leads to more than one per cent changes in output.
Stage 2- At the beginning of stage 2, the marginal returns start to decrease and the total product is maximum. In other words, it can be said, an average and marginal physical product start declining (Layson,2015). For instance, in the previous example, if a worker is added 10 more crafts to the products and another one is producing 8 crafts, then the total product curve of the company is still rising while average and marginal curve found to be in dropping situation. Although the firm is facing downwards slope, the total productivity will be still higher than stage 1.
At this stage average productivity is also equal to marginal productivity; hence elasticity coefficient is equal to 1. That means change lead by one per cent in input causes one per cent change in the output. It can be denoted as 0<_ep>
Stage 3– In this stage, the marginal product is found to be negative and total production is found to be declining at the same time. That means adding more values to the variable inputs seems to be counterproductive (Bjork, 2020). This is completely irrational. The output per unit for both variable input and fixed said to be negative.
As the marginal product is negative, so it depicts the elasticity is also negative with respect to any change in the input that implies no profit incurred even if factors is added.
To illustrate this, let’s take the previous example, hiring more employees to product crafts will leads to less number of total production.
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Thus this blog successful defines the three stages of production in economic along with determining the elasticity at each stage. Through the study, we are able to figure out the actual role of law diminishing margin returns that predicts when some optimal capacity is already achieved then the additional factor added to the production actually responsible for smaller increases in the total production. We have also defined the impact of fixed and variable resources in the long run and short-run project. In addition to this, we elaborated the three-stage of product process which defines in stage 1 the elasticity curve also found to be greater than unity as marginal productivity is greater than average productivity. Similarly, at stage 2-, the marginal returns start to decrease and the total product is maximum. At last in stage 3, it is eradicated that marginal product is found to be negative and total production starts declining at the same time. If you have any query and want essay helper assistance, get in touch with SourceEssay experts whenever you want.
Bjork, T. (2020). Profits and puppet theatre: Economics beyond permanent stages. Journal of the Oriental Society of Australia, The, 51, 142.
Foray, D. (2004). Economics of knowledge. MIT press.
Ganat, T. A. A. O. (2020). Understanding Exploration, Appraisal and Production Stages. In Technical Guidance for Petroleum Exploration and Production Plans (pp. 21-28). Springer, Cham.
Layson, S. K. (2015). The increasing returns to scale CES production function and the law of diminishing marginal returns. Southern Economic Journal, 82(2), 408-415.
Mindlin, Y. B., Zhukov, B. M., Prokhorova, V. V., Shutilov, F. V., & Belova, E. O. (2016). Main stages of the formation of an economic cluster. International Journal of Economics and Financial Issues, 6(1S).
Tsukamoto, T. (2017). John R. Commons’s Two Evolutionary Models of Capitalism: Industrial Stages and Economic Stages. In Contemporary Meanings of John R. Commons’s Institutional Economics (pp. 121-139). Springer, Singapore.