The Production Theory.
                     THE PRODUCTION THEORY
Introduction
In economics, production theory explains the principles in which the 
business has to take decisions on how much of each commodity it sells 
and how much it produces and also how much of raw material i.e., 
fixed capital and labor it employs and how much it will use.
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Definition
It defines the relationships between the prices of the commodities and 
productive factors on one hand and the quantities of these 
commodities and productive factors that are produced on the other 
hand.
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Concept
Production is a process of combining various inputs to produce an 
output for consumption. It is the act of creating output in the form of a 
commodity or a service which contributes to the utility of individuals.
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Function
The Production function signifies a technical relationship between the 
physical inputs and physical outputs of the firm, for a given state of the 
technology.
Q = f (a, b, c, . . . . . . z)
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Production Analysis
Production analysis basically is concerned with the analysis in which the 
resources such as land, labor, and capital are employed to produce a 
firm’s final product. 
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Types of Production 
Analysis
• Variable Inputs: Inputs those change or are variable in the short run 
or long run are variable inputs.
• Fixed Inputs: Inputs that remain constant in the short term are fixed 
inputs.
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Cost Function
Cost function is defined as the relationship between the cost of the 
product and the output. Following is the formula for the same −
C = F [Q]
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Types of Cost 
Function
• Short Run Cost: Short run cost is an analysis in which few factors are 
constant which won’t change during the period of analysis. The 
output can be changed ie., increased or decreased in the short run 
by changing the variable factors.
• Long Run Cost: Long-run cost is variable and a firm adjusts all its 
inputs to make sure that its cost of production is as low as possible.
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Law of Variable 
Proportions
• The law of variable proportions has following three different phases:
• Returns to a Factor
• Returns to a Scale
• Isoquants
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Returns to a Scale
• If all inputs are changed simultaneously or proportionately, then the 
concept of returns to scale has to be used to understand the 
behavior of output. 
• The behavior of output is studied when all the factors of production 
are changed in the same direction and proportion.
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