Theory of Production
ECON 212
By Wanja M. Douglas
Chuka University
November 13, 2025
, Introduction
• Welcome to the Theory of Production. Having extensively covered the
behavior of consumers (demand side of the market), we now turn our
attention to the producers (supply side).
• This lesson explores how firms make optimal choices to transform inputs
(like labour, capital, and raw materials) into outputs (goods and services).
• At its core, the theory of production is about how a firm operates within
the technological constraints imposed by nature and the economic
constraints imposed by the market.
2
, Lecture Objectives
By the end of this lesson, you should be able to:
i. Identify the different types of production technologies.
ii. Describe the technological constraints faced by a firm using production sets
and production functions.
iii. Understand and analyze production using isoquants and their properties.
iv. Define and calculate key concepts: Marginal Product and Marginal Rate of
Technical Substitution.
v. Explain the laws of Diminishing Marginal Product and Diminishing MRTS.
vi. Distinguish between the short run and the long run in production.
vii. Analyze Returns to Scale and determine the degree of homogeneity of a
production function
3
, Theory of Production
• A firm's primary goal is to produce output, but it cannot do so magically. It
faces fundamental constraints. The most basic of these are technological
constraints: there are only so many feasible, efficient ways to produce a
given level of output from a set of inputs.
• Inputs are also called Factors of Production and are classified into broad
categories: Land, Labor, Capital, and Raw Materials.
• Output is the good or service resulting from the production process.
4
ECON 212
By Wanja M. Douglas
Chuka University
November 13, 2025
, Introduction
• Welcome to the Theory of Production. Having extensively covered the
behavior of consumers (demand side of the market), we now turn our
attention to the producers (supply side).
• This lesson explores how firms make optimal choices to transform inputs
(like labour, capital, and raw materials) into outputs (goods and services).
• At its core, the theory of production is about how a firm operates within
the technological constraints imposed by nature and the economic
constraints imposed by the market.
2
, Lecture Objectives
By the end of this lesson, you should be able to:
i. Identify the different types of production technologies.
ii. Describe the technological constraints faced by a firm using production sets
and production functions.
iii. Understand and analyze production using isoquants and their properties.
iv. Define and calculate key concepts: Marginal Product and Marginal Rate of
Technical Substitution.
v. Explain the laws of Diminishing Marginal Product and Diminishing MRTS.
vi. Distinguish between the short run and the long run in production.
vii. Analyze Returns to Scale and determine the degree of homogeneity of a
production function
3
, Theory of Production
• A firm's primary goal is to produce output, but it cannot do so magically. It
faces fundamental constraints. The most basic of these are technological
constraints: there are only so many feasible, efficient ways to produce a
given level of output from a set of inputs.
• Inputs are also called Factors of Production and are classified into broad
categories: Land, Labor, Capital, and Raw Materials.
• Output is the good or service resulting from the production process.
4
