Three stages of production in the economy

The production includes the set of operations required to transform raw materials and other inputs into finished goods for consumers or semi – processed for use in other production phases. Adding value to inputs and merchandise.

When it is produced, a raw material is taken and with the investment of labor, machinery and energy, value is added and that input is transformed into a useful good for human beings.

Since production requires a large investment of physical, financial and human resources, it is extremely important to analyze and monitor costs over time and detect any change in the economic production curve or change in marginal costs.

An economic production curve shows a relationship in time of one or more inputs with respect to the quantities produced. In general lines, a function or production curve links or relates inputs with products.

In the economic production of a good there are three different moments or stages closely related to the law of diminishing returns and the concept of the marginal effect.

We call the marginal effect or marginal increase in economic theory to the impact or variation that we will have in the levels of production due to the use of an additional unit of one or more resources.

The marginal effect can be increasing, uniform or decreasing and each of these states or conditions marks the three stages of production in the economy. Let’s see some details related to each moment of the so-called “marginal productivity.”

Don’t stop reading: the relationship between the marginal product of labor and marginal costs

Product curves

The three stages of economic production are a function between variables such as inputs, labor, and production.

This function or curve is based on the law of diminishing returns, which happens when the output of production decreases, after a certain threshold of labor or other inputs is reached. Companies use this concept to schedule production and as the basis for hiring decisions.

There are three main product curves in economic production:

  • The total product curve
  • The mean curve of the product y
  • The marginal product curve.

The curve of the total product, is a reflection of the global production of the company, it is simply the quantity of articles produced through the use of all the labor and inputs. It is the base of the other two curves.

The average product curve is the average amount of production generated per unit of a certain factor or input.

Finally, a marginal product curve is slightly different: it measures the change or variation in output when a certain input is increased by one unit.

For example, if the mean curve represents the number of units produced on average based on a given number of employees, the marginal curve would show the number of additional units produced if one more employee is added.

A favorable result for a production analyst or for management is that the curves always show growth or stability, because in case of finding an inflection and subsequent decrease it will be necessary to take corrective measures.

Stage one

The first stage is the period of greatest growth in the production of a company.

This period is the most favorable, each additional entry will produce in comparative terms more products. Which implies an increasing marginal return.

As an example, if an employee produces five cans by himself, two employees will be able to produce 15 cans between the two of them. All three curves are increasing and positive at this stage.

Stage two

The second stage is the period in which marginal growth begins to decline and reaches zero. In other words, an additional unit of a certain input will not imply a higher additional production.

Each additional variable input will continue to produce additional units, but at a constant rate, with no surpluses or additional returns.

This is due to the law of diminishing returns: output decreases steadily for each additional unit of input variable, keeping all other inputs fixed.

For example, if an employee in stage one added nine or ten more cans to production, in stage two an additional employee would add five to eight cans.

In this situation, the total output curve continues to increase, while the average and marginal curves of both do not grow or begin to fall.

Stage three

In the third phase, the marginal returns turn negative.

Adding more variable entries is counterproductive; an additional source of labor will decrease global production.

For example, hiring an additional employee to produce cans actually results in fewer cans produced overall.

This may be due to factors such as facility capacity or efficiency limitations.

At this stage, the total product curve begins to trend downward, the average product curve continues to decline, and the marginal curve turns negative.

When this happens, economic decisions such as expanding capacity, studying production methods or displacing labor becomes imminent.