What is Production?

Production is the process of combining various material inputs and immaterial inputs (plans, know-how) in order to make something for consumption (output). It is the act of creating an output, a good or service which has value and contributes to the utility of individuals. The area of economics that focuses on production is referred to as production theory, which is intertwined with the consumption (or consumer) theory of economics.

The production process and output directly result from productively utilizing the original inputs (or factors of production). Known as primary producer goods or services, land, labour, and capital are deemed the three fundamental production factors. These primary inputs are not significantly altered in the output process, nor do they become a whole component in the product. Under classical economics, materials and energy are categorized as secondary factors as they are bi-products of land, labour and capital.

Delving further, primary factors encompass all of the resourcing involves, such as land, which includes the natural resources above and below the soil. However, there is a difference in human capital and labour.

In addition to the common factors of production, in different economic schools of thought, entrepreneurship and technology are sometimes considered evolved factors in production.It is common practice that several forms of controllable inputs are used to achieve the output of a product.

The production function assesses the relationship between the inputs and the quantity of output.

Production is the method of turning raw materials or inputs into finished goods or products in a manufacturing process. In other words, it means the creation of something from basic inputs.

Production may also refer to the goods being produced. For instance, some business call a set of products being produced at the same time a production run. Both of these definitions are interchangeable. Basically, it just means a manufacturing process or the end result of a manufacturing process.

Economists call businesses that produce goods producers. These companies create products to sell to their customers. For example, a clothing company produces clothing for consumers.

Today, however, companies are leaning toward the trend of outsourcing their production capacities, so that they do not need to perform it themselves.

For example, a clothing company may distribute clothing as their product, but the clothing itself is manufactured by an entirely different organization overseas. Sometimes the intangible process of brainstorming ideas for the products’ formation is also considered to be a part of the production process. An example of this is Apple. They design all of their electronics in California, but have them produced overseas.

Definition of Production:

Production “Is the organized activity of transforming resources into finished products in the form of goods and services; the objective of production is to satisfy the demand for such transformed resources” According to Bates and Parkinson

Production: “Is any activity directed to the satisfaction of other peoples’ wants through exchange”. This definition makes it clear that, in economics, we do not treat the mere making of things as production. What is made must be designed to satisfy wants. According to J. R. Hicks

Types of Production

Production can be divided into three main types:

1) Primary production

2) Secondary production

3) Tertiary production

1) Primary Production: This is the type of production that involves the tapping and harnessing of natural resources. It is concerned with the process of obtaining raw materials or resources in their natural form from the air, land, and water e.g. agriculture, mining, fishing, quarrying, etc.

2) Secondary Production:This type of production entails the processing of primary products or raw materials into finished or semi-finished products e.g. processed food, houses, roads, clothes, cars, furniture, paper milling, etc. It involves all stages that the good passes through after extraction to manufacturing.

3) Tertiary Production: This is a type of production that is concerned with the provision of commercial and professional services to the people. The people involved in this aspect of production include those who render services e.g. teachers, doctors, hairdressers, soldiers, policemen, lawyers, musicians, etc. It also includes those who render commercial services like wholesalers, retailers, transporters, etc.

Factors of Production

Factors of production are the inputs needed for creating a good or service, and the factors of production include land, labor, entrepreneurship, and capital.

The factors of production are an important economic concept outlining the elements needed to produce a good or service for sale. They are commonly broken down into four elements: land, labor, capital, and entrepreneurship. However, commentators sometimes refer to labor and capital as the two primary factors of production. Depending on the specific circumstances, one or more factors of production might be more important than the others.

The four factors of production are:

1) Land as factor of production

2) Labor as factor of production

3) Capital as factor of production

4) Entrepreneurship as factor of production

1) Land as factor of production: Land has a broad definition as a factor of production and can take on various forms, from agricultural land to commercial real estate to the resources available from a particular piece of land. Natural resources, such as oil and gold, can be extracted and refined for human consumption from the land.

Cultivation of crops on land by farmers increases its value and utility. For a group of early French economists called “the physiocrats,” who predated the classical political economists, land was responsible for generating economic value.

While land is an essential component of most ventures, its importance can diminish or increase based on industry. For example, a technology company can easily begin operations with zero investment in land. On the other hand, land is the most significant investment for a real estate venture.

2) Labor as factor of production: This refers to the effort expended by an individual to bring a product or service to the market. Again, it can take on various forms. For example, the construction worker at a hotel site is part of labor, as is the waiter who serves guests or the receptionist who enrolls them into the hotel. Within the software industry, labor refers to the work done by project managers and developers in building the final product. Even an artist involved in making art, whether it is a painting or a symphony, is considered labor. For the early political economists, labor was the primary driver of economic value. Production workers are paid for their time and effort in wages that depend on their skill and training. Labor by an uneducated and untrained worker is typically paid at low prices. Skilled and trained workers are called “human capital” and are paid higher wages because they bring more than their physical capacity to the task. For example, an accountant’s job requires the analysis of financial data for a company. Countries that are rich in human capital experience increased productivity and efficiency. The difference in skill levels and terminology also helps companies and entrepreneurs create corresponding disparities in pay scales. This can result in a transformation of factors of production for entire industries. An example of this is the change in production processes in the information technology industry after jobs were outsourced to countries with lower salaries.

3) Capital as factor of production: In economics, capital typically refers to money. However, money is not a factor of production because it is not directly involved in producing a good or service. Instead, it facilitates the processes used in production by enabling entrepreneurs and company owners to purchase capital goods or land or to pay wages. For modern mainstream (neoclassical) economists, capital is the primary driver of value. It is important to distinguish personal and private capital in factors of production. A personal vehicle used to transport family is not considered a capital good, but a commercial vehicle used expressly for official purposes is. During an economic contraction or when they suffer losses, companies cut back on capital expenditure to ensure profits.

However, during periods of economic expansion, they invest in new machinery and equipment to bring new products to market. An illustration of the above is the difference in markets for robots in China compared to the United States after the 2008 financial crisis. After the crisis, China experienced a multi-year growth cycle,and its manufacturers invested in robots to improve productivity at their facilities and meet growing market demands.As a result, the country became the biggest market for robots.Manufacturers within the States, which had been in the throes of an economic recession after the financial crisis, cut back on their investments related to production due to tepid demand.

4) Entrepreneurship as factor of production: In markets, entrepreneurs combine the other factors of production, land, labor, and capital, to make a profit. Often these entrepreneurs are seen as innovators, developing new ways to produce new products. In a planned economy, central planners decide how land, labor, and capital should be used to provide for maximum benefit for all citizens. Just as with market entrepreneurs, the benefits may mostly accrue to the entrepreneurs themselves.

Entrepreneurs work within and between corporate and government bureaucracies in new and different ways.It is also refer to as political entrepreneurs that are politicians and other actors.

Much controversy rages about the benefits produced by entrepreneurship. But the real issue is about how well institutions they operate in (markets, planning, bureaucracies, and government) serve the public. This concerns such issues as the relative importance of market failure and government failure.

An example of entrepreneurship is the evolution of the social media behemoth Meta (FB), formerly Facebook. Zuckerberg assumed the risk for the success or failure of his social media network when he began allocating time from his daily schedule toward that activity. When he coded the minimum viable product himself, Zuckerberg’s labor was the only factor of production. After Facebook, the social media site, became popular and spread across campuses, it realized it needed to recruit additional employees. He hired two people, an engineer (Dustin Moskovitz) and a spokesperson (Chris Hughes), who both allocated hours to the project, meaning that their invested time became a factor of production.

Other Concepts in Production

The concepts discussed below are adopted from Reddy et al. (2009):

1. Resources

Anything that aids in production is called a resource. They physically enter the production process to transform into output. For example seeds, fertilizers, feeds, veterinary medicines etc.

Resources can be classified into the followings:

i. Fixed Resources: Resources which remain unchanged irrespective of the level of production are fixed resources. These resources exist only in the short run. The costs associated with these resources are called fixed costs. Farmer has little control over the use of these resources. For example; land, buildings, machinery implements etc.

ii. Variable Resources: Resources which change with the level of production are called variable resources. The higher the level of production, the greater the use of these resources. The costs which are associated with these resources are called variable costs. These resources exist in the short run as well as long run.

Farmer can exercise greater control over the use of these resources. Examples are: seeds, fertilizers, plant protection chemicals, feed etc. The distinctions between fixed and variable resources cease to exist in the long run. In the long run all resources are varied.

iii. Flow Resources: The resources which cannot be stored and should be used as and when they are available. For instance, if the services of a labourer available on a particular day are not used, then they are lost forever, similarly, the services of machinery and farm buildings etc.

iv. Stock Resources: Stock resources are those which facilitate for their storage when they are not used in one production period. Examples are: seeds, fertilizers, feed etc.

2. Productivity

Productivity denotes the efficiency with which various inputs are converted into products. It signifies the relationship between output and inputs. In simple terms, output per unit of input is called productivity. For example productivity can be expressed as 10kg of output/ha.

3. Efficiency

Efficiency means absence of wastage or using resources as effectively as possible to satisfy the farmer’s need and goals. Efficiency can be expressed in the following ways:

i. Technical Efficiency: It is the ratio of output to input

ii. Economic Efficiency: It is the expression of technical efficiency in monetary value by attaching prices. In other words, the ratio of value of output to value of input is called economic efficiency. It is the maximization of profit per unit of input.

iii. Allocative Efficiency: It occurs when no possible organization of production can make any one better off without making someone else worse off. It refers to resource use efficiency. It is an ideal situation in which costs are minimum and profits are maximum.

4. Variable

Any quantity which can have different values in the production process.

Other concepts associated with variable are:

i. Independent Variable: it is a variable whose value does not depend on other variables. Such variables influence the dependent variable. Examples are: land, labour, liquid money, fertilizer etc.

ii. Dependent Variable: A variable that is governed by another variable. Example is crop output.

iii. Constant: A quantity that does not change its value in a general relation between variables.

iv. Coefficient: When rate per unit is calculated we use the term coefficient, a multiplying factor.

For example:

(a) The regression coefficient of an input to production function denotes response of output per unit of input

(b) Elasticity coefficient of input gives the percentage change in crop output per one cent increase in input level.

5. Slope

Slope of a line represent the rate of change in one variable that occurs when another changes i.e. it is the rate of change in the variable on the vertical axis per unit of change in the variable on the horizontal axis.

Slope is always expressed as a number. Slope varies at different points on a curve but remains the same on all points of a given line.