MEANING OF PRODUCTION; What do you understand by production in common parlance? Well, the simple answer would be the term production is an activity of making something material.
The following are the few examples of production:
| Growing of wheat, rice or any other agricultural crop by farmers.Manufacturing of cement, radio sets, wool machinery or any other industrial product.Making cloth by an industrial worker. |
PRODUCTION AND PRODUCTION FUNCTION IN BROADER VIEW:
Now the question is what do you exactly mean by production in Economics?
PRODUCTION FROM ECONOMIC VIEWPOINT:Production in economics is used in a wider sense to denote the process by which man utilizes resources such as men, capital, material, time etc to work upon them and transform them into commodities and services thereby satisfying human wants. In other words:
- Production is any activity which converts inputs into outputs which are capable of satisfying Human wants.
- Whether is making of material goods or providing service it is included in production provided it satisfies some human want.
- Following are few examples of production in economics:
| Cloth making by an industrial workerServices of retailers who provides it to consumersServices provided by doctors, lawyers, teachers, etc. |
DEFINITION OF PRODUCTION:
According to James Bates and J.R. Parikson “ production is the organized activity of transforming resources into finished products in the form of goods and services; and the objective of production is to satisfy demand for such transformed resources”.
PRODUCTION PROCESS:
Production process consists of various processes to add utility to natural resources for gaining greater satisfaction for them by:
- Changing in the form of natural resources:
- Changing the place of the resources:
- Making available materials at times when they are not normally available:
- Making use of personal skills in the form of services:
Each one of these points are explained in detail below:
- Changing in the form of natural resources: Most manufacturing processes consist of use of physical inputs such as raw materials and transforming them into physical products processing utility. It is also called as conferring utility of form. Examples:
| Changing the form of log of wood into a tableChanging the form of iron into machine |
- Changing the place of the resources: from where they are of little or no use to another place where they are of greater use. They emphasize the additional utility conferred on goods by all forms of transportation systems, the transport workers and the agents who assist them in the movement and marketing of goods.This can be done in two ways:
- Extraction from earth: removal of coal, gold, mines and other metal ores from mines and supplying them to markets.
- Transferring goods from where they have little or no use to place where they are of greater use.
| Examples:Tin in Malaya is of little use until it is brought to industrialized sectors where necessary technology is available to produce metal boxes for packing.Apples in Kashmir orchids have little utility to farmers. But when these apples are transported to markets where human settlements are thick and crowded like city centers they can satisfy the need of greater people. |
- Making available materials at times when they are not normally available: Also known as conferring utility of time. Examples:
| Harvested Food Grains are stored for use until next harvestCanning of seasonal fruits is undertaken to make them available during off season. |
- Making use of personal skills in the form of services: those of organizers, merchants, etc.
INTERPRETATION:
The fundamental purpose of all the activities is the same ie. to create utility in some form or the other. The following example will make the point clear:
| In the production of a woolen suit , utility is created in some form or another. Firstly, wool is changed into woolen cloth at the time of spinning and weaving mills ( utility created by changing the form). Then, it is taken to a place where it needs to be sold ( utility added by transporting it). Since woolen clothes are required only in winter it will be stored till there is demand by purchasers ( Time utility). In the whole process the utility of various people such as mill workers, shopkeepers, agents, etc are utilized to contribute to the enhancement of utility. Thus, the entire process of production is nothing but creation of form utility, place utility, time utility and or/ personal utility. |
FACTS OF PRODUCTION:
- Production process is not just the conversion of physical input into physical output. The services of doctors, lawyers, teachers, musicians, etc involve intangible inputs to produce intangible outputs.
- Work done in the household by anyone out of love and affection does not constitute production, voluntary goods and services produced for self consumption. Intention to exchange in the market is an essential component of production.
- Production is not creation of matter alone. Because as a fundamental science, man can not create matter. A man can only add utility or create utility to what already exists in nature.
EXAMPLE:
| A carpenter produces a table. He cannot create wood , he is only converting wood into furniture. |
- The money expenses incurred in the process of production i.e. for transforming resources into finished goods or products constitute the cost of production which is very important for business decision making.
- Production decisions can not merely depend on physical productivity based on operating efficiency alone.
- The profitability of a productive activity would depend upon the revenue realized from the output and cost incurred in raising that output.
- Production is an important economic activity.
- Production is addition or creation of utility.
- Survival of a firm in a competitive market depends upon the ability to produce goods and services at a competitive cost.
- Primary concern of the business manager is the achievement of optimum efficiency of production by minimizing the cost of production.
- Performance of an economy is judged by its level of production.
- The amount of goods and services a country is able to produce determines the richness or poverty of that economy.
- Standard of living of people depends upon the volume of goods and services produced in that country.
- the amount of goods and services a country is able to produce determines the richness or poverty of that economy.
- The USA is rich because its level of production is high.
Now let us understand what do we mean by Production Function? But before understanding the production function let us understand what do we mean by a function?
MEANING OF FUNCTION: A function is a symbolic statement of the relationship between the dependent and the independent variables. Now let us understand what do we mean by production function?
MEANING OF PRODUCTION FUNCTION: It is a statement of relationship between the firm’s scarce resources i.e. inputs and the output that results from the use of these resources. It states the technological relationship between the inputs and outputs. Production function is the minimum quantity of various inputs required to yield a given quantity of output.
DEFINITION OF PRODUCTION FUNCTION: According to Samuelson , “ The production function is the technical relationship telling the maximum amount of output capable of being produced by each and every set of inputs. It is defined for a given set of technical knowledge.
ASSUMPTIONS OF PRODUCTION FUNCTION: The following are the three main assumptions of production function:
- Relationship between input and output exists for a specific period of time.i.e. Rate of output for a given commodity is not a measure of accumulated output over time.
- It is assumed that there is a given state of art in the production technology because any innovation could cause a change in relationship in the input as well as output. If there is use of robotics in manufacturing or a more efficient software package for financial analysis would change the input output ratio.
- Whatever input combinations are included in the production function, the output resulting from their combination is at the maximum level.
PRODUCTION FUNCTION EXPRESSED IN ALGEBRAIC FORM: Production function if stated in an algebraic form where output is the depend variable and input is the independent variable can be stated as:
q= f ( a, b, c,d……n). Where q stands for rate of output and a,b,c,d….n stands for the different factors and services used i.e. inputs used per unit of time. For the purpose of analysis the whole array can be reduced to two L and K where L stands for land and K stands for Capital.
PRODUCTION FUNCTION EQUATION:
| Q=F( L,K) |
Where,
Q: Output
L: Labor
K: Capital
Types of Production Function:
Short run vs Long run Production Function:
A firm’s production function can be studied in the context of a short or long period. It has to be noted that in economic analysis, the distinction between the short-run and the long-run is not tied to any particular measurement of time (e.g., days, months, or years). It refers to the extent to which a firm can vary the quantities of inputs in the production process. A period is called short-run if the amount of at least one of the inputs used during that period remains unchanged. Thus, a short-run production function shows the maximum amount of a good or service that can be produced by a set of inputs, assuming that the amount of at least one of the inputs used remains fixed or unchanged. In general, it has been found that during the short-run period, the firm cannot install new capital equipment to improve production over a short period of time or in the short run. It implies that, in the short run, capital is a fixed factor. It implies that, in the short run, capital is a fixed factor. Thus, the production function is studied in the short term by holding quantities of capital fixed while varying the amounts of other components (labor, raw materials, etc.). When the law of variable proportion is studied, the production function can be studied in the long run as well. The production function can be studied in the long run as well. The long run is a span of time (or planning horizon) over which all production factors are variable. It is a period of time during which the firm will be able to install new machines and capital equipment, apart from increasing the variable factors of production. A long-run production function shows the maximum quantity of goods or services a firm can produce with a given set of inputs, assuming that the firm is free to vary the amounts of all inputs being used. This behavior of production when all factors are varied is the subject matter of the law of returns to scale.
The Cobb-Douglas Production Function: A famous statistical production function is the Cobb -Douglas Production Function. Paul H. Douglas and C.W. Cobb of the U.S.A. studied the production functions of the American manufacturing industries. In its original form, the production function applies not to an individual firm but to the whole of manufacturing in the United States. In this case, output is manufacturing production, and the inputs used are labor and capital.
The Cobb-Douglas production function is:
 |
where “Q” represents output, “L” represents the quantity of labor, and “C” represents the quantity of capital. The constants ‘K’ and ‘a’ are both positive constants.
The conclusion drawn from this famous statistical study is that labor contributed around 3/4 of the increase in manufacturing production, while capital contributed approximately 1/4. Still, the Douglas production function is being extensively used in economics as an approximation.
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