production theory the economic theory dealing with the conversion of factors of production into consumer goods. In capitalistic theories that assume ideal markets, firms produce goods from three kinds of factors: capital, labor, and raw materials. Production is subject to the constraint that profit (the difference between revenues and costs) be maximized. The firm is thereby faced with the following decisions: how much to produce, what price to charge for the product, what proportions to combine the three kinds of factors in, and what price to pay for the factors. In markets close to perfect competition, the firm will have little control over prices so the decision problem tends to reduce to the amounts of factors to use. The range of feasible factor combinations depends on the technologies available to firms. Interesting complications arise if not all firms have access to the same technologies, or if not all firms make accurate responses concerning technological changes. Also, if the scale of production affects the feasible technologies, the firms’ decision process must be subtle. In each of these cases, imperfect competition will result. Marxian economists think that the concepts used in this kind of production theory have a normative component. In reality, a large firm’s capital tends to be owned by a rather small, privileged class of non-laborers and labor is treated as a commodity like any other factor. This might lead to the perception that profit results primarily from capital and, therefore, belongs to its owners. Marxians contend that labor is primarily responsible for profit and, consequently, that labor is entitled to more than the market wage.
See also PERFECT COMPETITION , PHILOSO- PHY OF ECONOMIC. A.N.