Production is the act of creating output that is used and valued by consumers. Maintaining appropriate production levels are required in order to sustain a certain growth or decline. Overproduction or underproduction can be costly if these are misaligned. For example, if it is determined that the prosperity is shrinking, production capacity must be reduced to ensure profits are maintained. To maximize profits, production output must follow the microeconomic predictions.
Factors that affect production are mostly related to the consistent supply of raw materials for the production levels predicted in the economic model. In addition, in a manufacturing based environment, labour is an important factor in ensuring that production is maintained at the correct level.
The production possibility frontier (PPF) is when an economy is producing its goods and services and allocating resources in the most efficient way possible. The production possibility frontier displays the limits to production for an economy. In order for an economy to be efficient, a certain combination of goods and services must be produced. In the short run, production has a fixed input factor: capital. On the other hand, in the long run you can vary both input factors labour and capital.
Some important concepts to know when discussing microeconomic production is the marginal product (MP), which is the change in total output created by adding an extra unit of labour, and average product (AP), which is the total output divided by the total units of labour employed.