MEANING OF PRODUCTION
Production in economics generally
refers to the transformation of inputs into outputs. Inputs are the raw
materials or other productive resources used to produce final products i.e.,
output. In technical terms, production means the creation of utility or
creation of want-satisfying goods and services. Any good become useful for us
or satisfies our want when it is worth consumption. Thus, a good can be made useful
by adding utility. For instance, we cannot consume wheat flour raw when we are
hungry (want), unless it is turned into bread (output). This conversion of
wheat flour into bread is the process of creating utility. Utilities can be
created in three ways. These are the following:
1. By
changing form or shape and size of a good. The powdery wheat flour has been changed to slices of bread. Thus form of the good has been
changed. Likewise, a carpenter giving shape of a chair to a piece of wood or a
chef turning a lump of dough into delicious pizzas, are the examples of
changing shape or size of a good/s and thereby creating utility.
2. Using the scarce goods and services
in proper time when they are most required. Government maintains a buffer stock
so that during the time of crisis, it releases food grains in the market to
meet the demand.
3. By transferring a good from one
place to another where its use is worthwhile. Sand transferred from river side
to construction site increases its utility.
Thus, production is the process of
adding utility to a good through form utility, place utility and time utility.
MEANING OF PRODUCTION FUNCTION
Production function is defined as
the functional relationship between physical inputs and physical outputs.
According to Stigler, “the production
function is name given to the relationship between the rates of input of
productive services and the rate of output of product. It is the economist’s
summary of technological knowledge.” Production function can be expressed
as follows:
Q = f (a, b, c, d…)
Where, Q stands for output, a, b,
c, d…. are the productive resources or inputs that help producing Q
output; f refers to function. Thus Q
is the function of a, b, c,
d….., which means Q depends upon a, b,
c, d…..
Thus a production function shows the
maximum amount of output that can be produced from a given set of inputs in the
existing state of technology.
RETURNS TO A FACTOR AND RETURNS TO
SCALE
There are generally two types of
production functions mostly used in economics. First, the production function
when the quantities of some inputs are kept fixed and the quantity of one or
few input/s are changed. This kind of production functions are studied under
law of variable proportions. These are also called short-run production
function. The short-run is a period during which one or more factors of
production are fixed in amount. There is no time to change plants or equipments
of an enterprise.
Secondly, the production functions
in which all inputs are changed. This forms the subject matter of the law of
returns to scale. These are also called long-run production function. The long
run is a period during which all factors become variable. A new plant can be
constructed in place of an old one.
Law of Variable Proportions/Law of
Diminishing Returns
Law of variable proportions occupies
an important place in the economic theory. It examines the production function
with one factor variable, keeping the quantities of other factors constant.
This law tells us how the total output or marginal output is affected by a
change in the proportion of the factors used. The law states that when one
factor is increased keeping others fixed, the marginal and average product
eventually declines. According to Stigler, “As
equal increments of one input are added; the inputs of other productive services being held constant, beyond a
certain point the resulting increments of product will decrease, i.e., the
marginal products will diminish.” Thus, an increase in the quantities of a variable factor to a fixed factor
results in increase in output to a point beyond which it eventually declines.
Assumptions of the law
The
law assumes the following:
1. The state of technology is assumed
to be constant.
2. There must be some inputs whose
quantity is kept fixed.
3. The law is based upon the
possibility of varying the proportions in which the various factors can be
combined to produce a product. It cannot be applied to the cases where the
factors must be used in fixed proportions to yield a product.
Returns to Scale
