STAGES OF PRODUCTION

What you write: The stages of production answers the question, “how many workers do we hire?” There are three stages of production: (1) Stage I – Increasing Returns (2) Stage II – Diminishing Returns (3) Stage III – Negative Returns What you need to know: What are the stages of production? The definition is “phases of production that consist of increasing, decreasing, and negative returns”

What you write: The theory of production deals with relationships between the factors of production (land, labor, capital, and entrepreneurship) and the output of goods and services. Short Run – time only to change labor Long Run – time to adjust the quantities of all their resources What you need to know: What is theory of production? It states that a change in the variable input called labor results in a change in production.

What you need to know: Stage 1: Increasing Marginal Returns- As the number of workers increases, they make better use of their machinery and resources. This results in increasing returns (or increasing marginal products). When a firm learns that each new worker increases output more than the last, it is motivated to hire another worker. As a result, the firm ends up producing in the next stage…

What you need to know: Stage 2: Decreasing Marginal Returns- This begins when the sixth worker is hired and where marginal returns start to decrease. Production keeps growing, but in smaller and smaller amounts. What you need to write: Most firms operate in this stage (Stage II). This is the stage where workers start to get in one another’s way, and the production begins to slow.

What you need to know: Stage 3: Decreasing Marginal Returns- This stage occurs when the firm hires too many workers. Since there are too many workers, it negatively interferes with production, causing an overall fall in output (marginal product of each additional worker is negative).