Production THEORY

2. 
Production is the process of transforming raw materials
or purchased components into finished products for
sale.
“Transforming inputs into outputs”
Production

3. 
In economics, factors of production are the inputs to the
production process. Any commodities or services
used to produce goods or services are the factors of
production.
 Land
 Labor
 Capital
 Entrepreneur
Factors of Production

4. 
Land:
It is a natural factor of production. It is also called the
primary factor of production. Water, air, soil,
minerals, flora, fauna etc. are used in production.
Some important features are:
Land is free gift of nature
Land is limited in area
Land is permanent
Land lacks mobility
Land is infinite variety
Factors of Production

5. 
Labor:
Labor is human effort used in production. It is also
classified as the physical and mental contribution
of employees. Some important peculiarities of
labor are:
Labor is inseparable from laborer
Labor is perishable factor
Labor is an active factor of production
Labor has imperfect mobility
Labor supply is inelastic
Labor is a human capital
Factors of Production

6. 
Capital:
Capital is a produced means of production. In
economics, capital is the part of wealth used in
production. The features of capital are:
Man – made and productive factor
Elastic supply
Durable
Easy mobility
Is a wealth
Derived demand
Factors of Production

7. 
Entrepreneurship:
It is the “Risk Bearing Function” and entrepreneur
is the risk bearer. All the other factors usually
assemble together and this work is done by
entrepreneur. Some skills to be a successful
entrepreneur:
 Ability to organize
 Professional approach
 Risk bearer
 Innovative
 Decision making
 Negotiation skills
Factors of Production

8.  Production Function shows the level of output that
a firm can produce for specified combination of
inputs. It shows how output varies as the factor
inputs change. It is a technical tool to analyze
input-output relationship. The functional form is
where:
Q = quantity of output
= Quantities of factor inputs
Production Function

9. 
The short run is a time period where at least one
factor of production is in fixed supply.
In the theory of production, short run is a period
during which some of the factors of production
mentioned above are constant. For example, in the
short run, firm can not buy a new machine, build
A new building. So capital may remain constant in
the short run.
Short Run Production

10. 
Short run production function:
Q = f (L,K)
where,
L is variable and K is fixed factor
of production.
Usually, in the short run, the firm cost structure has
to consider the fixed costs (FC) in a given period of
time regardless of production level. The variable
cost is associated with the production cost.
Short Run Production

11. 
In the long run, all factors of production are variable,
all inputs of production can be changed by
management. fixed and variable inputs are elastic.
Long run production function:
Q = f (L,K)
where both L and K are variable factors of
production.
Long Run Production

12. For an example, for a poultry firm, long run will be a
period, till it increases its capacity by adding
poultry stock (which may take say 2 weeks). But
for a cement factory, it may take 2 years to increase
its capacity by constructing a new plant. So long
run for cement factory may be 2 years.
Long Run Production

13. 
Total Product:
The total product is generated from the total output
from the factors of production employed by the firm.
It is the quantity of output produced per time period
given the inputs.
Total, Average and
Marginal Product

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