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April 4, 2020 

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LAW OF DIMINISHING MARGINAL RETURNS: A principle stating that as more and more of a variable input is combined with a fixed input in short-run production, the marginal product of the variable input eventually declines. This is THE economic principle underlying the analysis of short-run production for a firm. Among a host of other things, it offers an explanation for the upward-sloping market supply curve. How does the law of diminishing marginal returns help us understand supply? The law of supply and the upward-sloping supply curve indicate that a firm needs to receive higher prices to produce and sell larger quantities. Why do they need higher prices?

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PRODUCTION TECHNOLOGY, SUPPLY DETERMINANT:

The knowledge and information that suppliers have about production (that is, production techniques or the way inputs are combined to produce outputs) which are assumed constant when a supply curve is constructed. Production technology is one of five supply determinants that shift the supply curve when they change. The other four are resource prices, other prices, sellers' expectations, and number of sellers.
The information available concerning production techniques affects the ability to supply a good. Technology is what producers know about the ways to combine inputs into the production of outputs. An advance in technology makes it possible to sell more of a good. A decline in technology means producers can sell less of a good.

Doing More with Less

Production technology affects the manner in which resource inputs are combined to produce outputs. An advance in technology means that a given amount of resources can be used to produce more goods, or that the same amount of production can be obtained with fewer resources.

While a decline in technology is theoretically possible, advances are more prevalent and a great deal more likely. A decline in technology means that a given amount of resources can be used to produce fewer goods, or that the same amount of production can be obtained with more resources.

Consider the production and supply of Wacky Willy Stuffed Amigos to illustrate an advance in technology. When William J. Wackowski founded of The Wacky Willy Company, he did so with limited technology. His sewing machines were manually operated. Workers cut patterns with simple scissors. The button eyes were attached to each stuffed creature with a needle and thread. The Stuffed Amigos were stuffed by hand. Using this limited technology, each Wacky Willy worker was able to fabricate five Stuffed Amigos per day.

The Wacky Willy Company now uses more advanced production technology. The entire process is automated and computerized, from pattern cutting to sewing to stuffing. This advanced technology allows each Wacky Willy worker to produce five hundred Stuffed Amigos per day.

An increase in production technology has made it possible for each Wacky Willy worker to produce more output. As a general rule, technological advances make it possible to produce more output with fewer inputs and with a reduction in production cost.

Shifting the Supply Curve

Production Technology

A change in production technology causes the supply curve to shift. This can be illustrated using the positively-sloped supply curve for Wacky Willy Stuffed Amigos presented in this exhibit. This supply curve captures the specific one-to-one, law of supply relation between supply price and quantity supplied. Production technology is assumed to remain constant with the construction of this supply curve.

Now, consider how changes in production technology shift the supply curve.

  • An Advance in Technology: An advance in production technology causes an increase in supply and a rightward shift of the supply curve. With the greater technology, sellers are able to sell more Stuffed Amigos. Click the [Advance] button to demonstrate.

  • A Decline in Technology: A decline in production technology causes a decrease in supply and a leftward shift of the supply curve. With the less technology, sellers are able to sell fewer Stuffed Amigos. Click the [Decline] button to demonstrate.

<= PRODUCTION STAGESPRODUCTION TIME PERIODS =>


Recommended Citation:

PRODUCTION TECHNOLOGY, SUPPLY DETERMINANT, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2020. [Accessed: April 4, 2020].


Check Out These Related Terms...

     | supply determinants | resource prices, supply determinant | other prices, supply determinant | sellers' expectations, supply determinant | number of sellers, supply determinant | demand determinants | buyers' preferences, demand determinant |


Or For A Little Background...

     | supply | market supply | supply price | quantity supplied | law of supply | supply curve | change in supply | change in quantity supplied | ceteris paribus | technology | production cost |


And For Further Study...

     | Marshallian cross | comparative statics | competition | competitive market | market | producer surplus | production cost | short-run production analysis |


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