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| Production in Economics | IndianTechnoEra |
What is Production ?
Meaning of the word production is to Making something material.
Definition by Economics
- Converts the resources of nature to satisfy human wants.
- Actively directed towards the satisfaction of wants of people by converting.
- Physical input into physical output.
Example: Making of cloth, service of doctors, lawyers, teachers, actors and dancers etc
Production of creation of utility:
Raw material to finished goods
- Place Utility- Extraction from earth to transforming goods
- Time utility–making them available at the time when required
- Personal utility- personal utility
Factors of Production
Factors or resources which makes Production possible
1. Land
2. Labour
3. Capital
4. Entrepreneur
Land
Land Not limited to soil or earth surface but includes –all free gift of nature , water, air, natural vegetation etc.
Characteristics
- Nature Gifts
- Supply is fixed
- Indestructible power
- Passive factors
- Different uses
Labour
Intentions to economics, it is mental or physical excretion for reward and not for pleasure /love Ex- work of maid v/s work of homemaker
Characteristics of labour factor of production
- Human effort
- Perishable
- Inseparable form labourer
- Power differ to laborer to laborer
- All laborer not productive
- Poor bargaining power
- Choice hours of labour vs hours of leisure
- Mobility of resource
Capital
Part of wealth used for further production of wealth
Capital vs. wealth
Capital stock vs. income flow concept
Man made instrument of production Help in production process
Types of Capital
- Fixed capital
- Circulation capital
- Real capital
- Human capital
- Tangible capital
- Intangible capital
- Individual capital
- Social capital
Capital Formation
There are different capital formation like;
- Increase in stock of real capital
- Investment
- Replacement, renovation & additional investment
- Cut down current production & use for capital goods
Stages of capital formation
There can be different capital formation stages like;
- Saving
- Mobilization of saving
- Investments
Entrepreneur
Organizer, risk taker, manager initiate production work & bear risk
Function of entrepreneur
1. Initiating business enterprise & resource coordination
2. Risk bearing & uncertainty bearing
3. Innovations: Schumpeter introduce new
Production Function
Prof. Koutsoyiannis: “The production function is purely its inputs and output technical relation which connects factor’’
Prof. Watson “The relation between a firm’s production and material factors of production”
Q=f(K,L, N)
Where,
Q = Quantity, f = Function, K = Capital, L = Labour, N = Land
Types of production function
Features of Production Function
- Sustainability
- Complementary
- Specificity
Assumption of Production Function
- Particular Unit of time
- Technical knowledge
- Factors of production are divisible into most viable units
- Producers using best technique available
Law of production
Law of variable Proportions
Input – Output relationship with by varying one factor of production.
Law operate under short run.Short run is period where only one FOP is variable and other are fixed or constant.
Assumption of law of variables Proportion
- State of technology remain unchanged
- One factors is changed other are constant
- Not when factors are to used in fixed proportions
- Input & Output not profitability
Definitions variable proportions
According to Benham :
As the proportion of the factor in a combination of factors is increased after a point, first the marginal and then the average product of that factor will diminish.
According to Stigler :
As equal increment of one input are added, the input of other productive services being held constant, beyond a certain Point the resulting increment of product will decrease that the marginal product will diminish.
Variable proportion happens in 3 stages
1. Law of Increasing Return (Production increasing in increasing rate)
2. Law of Diminishing return (Production increasing at a diminishing rate)
3. Law of Constant return (Production starts to decrease) Law of variable Proportions
Stage 1. Law of Increasing return
- Ends AP is MAX
- TP increase at increasing rate till point F
- MP is rising & is max. at point from F
Reasons 1. : Fixed factors is more efficiently utilized Indivisibility of fixed factor. 2. Efficiency of variable factor.
Stage 2. Law of Diminishing return
1. Ends when TP is MAX
2. MP & AP decrease, hence DR
Reasons 1. Fixed factors is inadequate. - indivisibility of fixed factors worked too hard. 2. Imperfect substitute of factors of production.
Stage 3. Law of Negative Return
1. MP is negative
Reasons 1. Quantity of variable factor too excessive for fixed factor
Returns to Scale
It show the degree by which the level of output changes in response to a given change in all the inputs in a production system.
Constant Returns to Scale : When a proportional increase in all inputs yields an equal proportional increase in output
Increasing Returns to Scale : When a proportional increase in all inputs yields a more than proportional increase in output
Decreasing Returns to Scale : When a proportional increase in all inputs yields a less than proportional increase in output.
Return to Scales
Measures how output changes relative to resource inputs in the long run and indicates how overall resource efficiency changes: Where: Q – output I – Resource Input
Economies of the Scale of Production
According to Stinger, Economies of scales is synonyms of returns to scale. When scale of production is increased, up to a point, one gets economies of scale. Therefore, diseconomies of scale follow. Increasing returns to scale is the result of these economies.
Marshall has divided economies of scale into two parts :
- Internal Economies
- External Economies
Internal economies of scale
Are those economies which are internal to the firm. These arise within the firm as a result of increasing the scale of output of the firm. A firm secures these economies from the growth of the firm independently.
The main internal economies are grouped under the following heads:
- Technical Economies
- Managerial Economies
- Marketing Economies
- Financial Economies
- Risk Bearing Economies
- Economies of Scale
External economies of scale
Are those economies which are not specially availed of by any firm. Rather these accrue to all the firms in an industry as the industry expands.
The main external economies are as under:
- Diseconomies of pollution
- Excessive pressure on transport facilities
- Rise in the prices of the factors of production
- Scarcity of funds
- Marketing problems of the products
- Increase in risks