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Economics – Production and Cost


Production refers to the process of converting inputs into outputs. It is an economic process that involves use of resources in creating a good or service that is important for trading purposes. Production covers aspects of manufacturing, aspects of packaging, shipping and storing (Frank, 2004). Isoquant in economics is simply a contour line passing through a set of points under which the same quantity of output can be produced using different combination of two or more inputs. Though indifference curve provides solutions to utility maximization problem of consumers, the isoquant is concerned with cost minimization problems of producers. They normally give a picture of a kind of tradeoff between capital and labour in the production function graph and the steady decrease of the marginal returns of the two inputs. When the other factor of production is held constant, adding one more of the input will lead to the marginal output decreasing. This reflects the shape of the isoquant (Frank, 2004).

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Production is affected either by economies of scale or by diseconomies of scale. Increasing returns to scale will arise when the cost of production of additional units will be less than that of the previous units. These is an indication of falling average cost. This condition happens only when at any given level of production; the average cost is higher than the marginal cost. On the contrary, the average cost tends to rise for each unit of production at a point where marginal cost is higher than the average cost at a given level of production. Hence this kind of production exhibits the phenomenon known as diminishing marginal productivity.

According to James (1986), an increase in productivity is much easier at low levels of production due to the falling marginal costs, but gains in production become smaller as production increases. With time marginal costs rise as a result of an increase in output due to existing factors of production which tend to be more expensive. Isoquant graphs always show decreasing and increasing returns to scale depending on the increasing and decreasing distance apart between the isoquant on the map as the output decreases.

If the distance apart of the isoquants increases as the output increases then a firm is experiencing decreasing returns to scale; that is tripling both inputs will bring about placement on an isoquant with less than triple the output of the original isoquant. Conversely if the gap between isoquants is decreasing as output increases then a firm exhibits increasing returns to scale; that is tripling both inputs will place an isoquant with more than triple of the output of the previous output (James, 1986). Giving example of hiring of workers in the usage of trucks in transporting goods. Putting assumptions that the number of trucks (capital) is constant, then the size of the variable input (labour) could be varied to determine ultimate efficiency. To say the least one laborer (the driver) is necessary. When you add more labors per vehicle, it could likely be useful in loading and unloading, navigation of the vehicle and continuous driving. At some point however the returns to investment in workers will begin to diminish and efficiency will decrease. Ultimately, the efficient distribution of labour for every track will most likely be one driver and an additional worker for any other task.

The allocation of resources and the distribution of efficiencies in the combination of capital and labour will tend to vary depending on the industry and the technology available. This theory of putting everything constant implies that the production method should in reality not be changed, like labour division should not be practiced. As James (1986) suggests, an increase in marginal product implies that the workers are using means of production method. We can take an example of a plot as a business entity because is also a form of investment and the owner of the plot expects some returns from cultivating the plot. Given that the size of the plot is constant a kilogram of seed to be planted on the plot yields one ton of the produce. It is anticipated that an additional kilogram of the seeds to be planted will produce an additional ton of the output (Roger, 1998).

However this might not be the case because of the diminishing marginal returns, thus additional kilogram of seeds will produce less than a additional unit ton of the yields on the respective land during the planting season, assuming that nothing else changing but only amount of seeds being planted. A second kilogram of the seeds might manage to give ½ ton of extra output. A third one might produce an additional yield that will be much less than ½ ton of additional yields. This implies that in the short run the firm would be able to produce yields that will cover the cost of buying the seeds and at least to remain with enough profit. In the long run however the farm would not be profitable because of the decrease in marginal product and increase in marginal costs. Therefore the owner of the plot will be forced to abandon cultivation and involve in other ways of getting money or buy more land so as to increase productivity (Roger, 1998).


Generally firm that is operating at point where its marginal product is less than marginal cost is faced with challenges of being shut down. This is because it is unable to cover the vital costs that are needed to run the firm and thus production of extra unit will cost a company a lot of money. Therefore a company needs to readjust to the changing global market in order to compete with other companies producing the same product (Roger, 1998). A firm needs therefore to embrace new ideas of doing things. Firm can invest in technologies that are efficient and effective in terms of cost input. Investing in technologies that require less manpower is encouraged (James, 1986). This will have a holistic effect of pushing the isoquant to the next level meaning that a firm will increase production and thus its marginal product will again be greater than marginal cost.

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Frank, K (2004). Profits and Uncertainities. Boston : Houghton and Mifflin.

James, M (1986). Microeconomics.Newyork: Macmillan.

Roger, L (1998). Production costs and Prices in the Short-run and Long-run.Cambridge: Havard Univesity.

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