In the manager’s effort to minimise production costs, the fundamental questions he or she faces are:
(f) How can production be optimized or costs minimised?
(g) What will be the beaviour of output as inputs increase?
(h) How does technology help in reducing production costs?
(i) How can the least-cost combination of inputs be achieved?
(j) Given the technology, what happens to the rate of return when more plants are added to the firm?
The Theory of Production
Production theory generally deals with quantitative relationships, that is, technical and technological relationships between inputs, especially labour and capital, and between inputs and outputs.
An input is a good or service that goes into the production process. As economists refer to it, an input is simply anything which a firm buys for use in its production process. An output, on the other hand, is any good or service that comes out of a production process.
Economists classified inputs as (i) labour; (ii) capital; (iii) land; (iv) raw materials; and,
(v) time. These variables are measured per unit of time and hence referred to as flow variables. In recent times, entrepreneurship has been added as part of the production inputs, though this can be measured by the managerial expertise and the ability to make things happen.
Inputs are classified as either fixed or variable inputs. Fixed and variable inputs are defined in both economic sense and technical sense. In economic sense, a fixed input is one whose supply is inelastic in the short run. In technical sense, a fixed input is one that remains fixed (or constant) for certain level of output.
A variable input is one whose supply in the short run is elastic, example, labour, raw materials, and the like. Users of such inputs can