Theory Of Production

Theory of Production Production: Basic concept • Transformation of input into output • Creation of utility • Act of creation of utility by transforming the Input (land, labor, capital and raw material) into output through organizing and combining the productive resources Production is related to: – Physical change of the objects, and – Services that satisfies the intangible needs of human being. • Therefore the scope of the term production covers the manufacturing activities like Rice, cloth and cars as well as the services like banking, transportation, media etc..

Production function • Relationship between maximum amount of output that can be produced and the inputs required to produce that output • It is defined for a given level of technology and therefore there can be a number of production function for each product under different state of technology

Factors of production • Hundreds and thousands of factors can be used • They can be classified under 4 broad generic factors – Land – Labor – Capital – Entrepreneurship

Factors of production - Land • It means all the natural resources, which yields income or which has exchange value • In the other word, it refers to all the natural resources, which is used in production. Land – Features • Land is free gift of nature • It has fixed quantity of supply • It is permanent in nature • Lack of geographical mobility • Infinite variety

Labor • Any “Human Effort” involved in the production function in exchange of money. • Unlike the ordinary use which means only the physical and unskilled work, labor, in economics means manual or physical work which is undertaken for monetary consideration. Labor- Features • Inseparable from laborer • Has to be sold in person • Doesn’t last long • Late adjustment in supply as a result of change in price

Capital • Produced means of production • It is that part of the produced elements that is further used in production instead of being consumed directly Capital – features • Capital is produced element • Capital has certain longevity • It is mobile • Amount capital can be increased through human effort • Income from capital is uniformed if it is used with same degree of efficiency

Organization/ Entrepreneurship • Human element that initiates and directs the production process by combining the productive resources • Differs from labors in the following ways: • Labor responsible for a particular job, where as entrepreneur responsible for whole production process • Labor’s return is fixed and assured where as case is opposite for entrepreneur’s return Entrepreneurship – features • Decision Maker • Brings the productive resources together • Risk taker • Innovator

Marginal, Average and Total Production Three important production concepts stating the relationship of a single input with the output • Marginal Product Marginal Product of an input is the extra amount of product that has been produced by applying 1 unit of that input holding other factors constant. It measures the additional units of output that can be obtained by using extra unit of an input after certain limit. • Average product Average output produced by one unit of input at a certain level of input being used. calculated by diving the total output by the number of the input being used. • Total product It is the total volume of out put at a given time