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1. THEORY OF
PRODUCTION

2. Production Function
 Production is the creation of goods
and services using inputs. Outputs
refer to the goods and services that
have been created using the
production inputs. Inputs of
production refer to land, labor,
capital, and entrepreneurship
(factors of production).

3. LAND
 Pertains to natural resources, not man-
made.
 Includes everything found on or under
land, including mountains, bodies of
water (like rivers, lakes, ocean), minerals,
air and sunlight.

4. LABOR
 Consists of power or capacity of human
beings.
 Physical and mental
 Applies not only to workers, farmers of
laborers, but also to professionals like
accountants, economists, or scientists.

5. CAPITAL
Anything used to produce other
goods
Money, machineries, tools

6. Types of Inputs
 Fixed Inputs – those that remain constant
regardless of the volume of production or
quantity of production.
 Where there is production or none, the
factors of production are unchanged

7. VARIABLE INPUTS
 Those that vary in accordance with the
volume or quantity of goods or services
[produced.
 If there is no production, then, there is no
variable input.

8. THE LAW OF DIMINISHING
RETURNS
 When successive units of variable input is
combined with a fixed input, the TOTAL
PRODUCT (TP) or output will increase. But
beyond some points, the resulting
increase in output will decrease, or will
become smaller and smaller

9. TOTAL PRODUCT (TP)
Total production or
output

10. MARGINAL PRODUCT (MP)
 THE ADDITIONAL OUTPUT PRODUCED BY
ADDING UNITS OF INPUT (X) HOLDING THE
LEVEL OF USAGE OF ALL OTHER INPUTS
CONSTANT