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Theory of Production

Theory of Production is the branch of economics concerned with analysing the determinants of the firm's choice of quantities of the inputs and the level of output it wishes to produce.

"The theory of production is based on the hypothesis that the firm will wish to use that set of quantities of the inputs that minimizes the overall cost of producing a given output."

Then, by varying output, it is possible to construct the output cost relationships that are the basis for much of theory the firm. In addition, the analysis of production theory forms the basis for the theory of marginal productivity and the determination of factor prices.

Concept of Production

The act of transforming the factors of production into the goods and services that are desired for consumption and investment. A carpenter makes a table. He has produced wealth. But he does not produce wood; it was already there. The carpenter has thus created what is called Form Utility. If the carpenter sends the table to a big city, it will fetch a higher price. Now, it acquires additional utility. Its transport action to the city means the creation of Place Utility. In case, the carpenter keeps the table with himself till tables are in greater demand, he may further add to its price. This storing creates Time Utility.
In the examples cited above, utilities have been created and physical goods produced.

"Production is best defined as the creation of value of goods and services."

In Economics, we are not concerned with the technical processes of production; we do not study how cloth is woven. We do not learn the art of making it. That is the work of spinners, weavers and dyers. The students of Economics have simply to note the various stages through which cotton passes - ginning, carding, spinning, weaving, bleaching, etc - till it reaches the hands of the final consumer. The act of production is not complete till the commodity reaches the hands of consumers. Thus, we are concerned with the economic aspect, i.e., cost, price, profit, etc. and not the technical aspect.

Short Run and Long Run

In production theory, we have in general, two time periods in mind - the short period or the short run, and the long period or the long run. The basis of distinguishing between them is that in the short run, some inputs employed by the firm are fixed while others are variable and in the long, all inputs are variable.
The short-run is a period of time that is long enough to allow the variable inputs to be used in different amounts so that maximum profits are earned but during which fixed inputs cannot be altered. It is the period during which the firm does not make important changes in its more durable factors. For example, firms do not make any changes to plant size, machinery or other big components. Within it, the firm can increase its output only by hiring some labour and buying more raw materials. Although the size of the plant is fixed in the short run, the services provided by it depend on the rate of variable inputs, and the degree of utilization of the plant is determined by the rate of variable inputs.
On the other hand, in the long run, the amount of any fixed input used by the firm can be altered. The long-run is the period during which the size of the plants is freely variable. In the long run, the firm can construct a plant that will be of an economically optimum size. It can alter its size and organisations to meet the changed conditions. With its increased size, it can deal with increased output more adequately. It is able to adapt the scale of its operations to produce any required output in the more efficient possible way. It can use invisible inputs more economically because, in the long run, they are often, to some extent, at least, divisible. But it must be made clear here that there is concealed limitation on the free availability of all inputs even in the long run. Factors like capital equipment, certain kind of labour and of other resources are not, in specific forms, indefinitely divisible to small units. Management in some sense a fixed imperfectly variable factor.

Factors Affecting Production

There are several factors that go to determine the volume of production in a country. They are:

Natural Factors

The amount and nature of production in a country depends on its climate, nature of the soil, rainfall, etc. Production is diminished by natural calamities like earthquakes, floods, droughts and hailstorms.

Political Factors

The form and character of the government have a great deal to do with the volume of production in a country. Different forms of government follow different policies which have their bearing on the Producer's behaviour.

Technical Progress

Production largely depends on the state of specific knowledge and the technical progress in the country. Discovery of new materials, new progress and new machines are bound to increase the volume of production.

Development of Credit and Banking and Means of Transport and Communication

Without a sound banking system and efficient and cheap means of transport and communication, production is bound to suffer. These are the prime need of a country if production is to be increased. They are known as infrastructure.

Mindset of People

Hard-working, educated and disciplined people can always produce relatively more and better goods than those who do not possess such qualities. This distinction is very clear between developed and underdeveloped countries.

Elements of Production Process

Production is the creation of utilities through the transformation of two or more inputs/resources into one or more products. Transformation takes place by combining the inputs in various amounts in the production process. The word combining necessarily implies that there must be more than one input to make a product. If nothing added, the original resource would simply remain whatever it was. Thus, nothing can be made with less than two inputs, and some products need hundreds of different inputs for their creation. For example, farm managers producing crops use several different kinds of inputs in the production process. To begin with, they use the land as the basic resource or medium for producing crops. Through this medium (land), they use machinery and labour to plant, cultivate, and harvest the crop. Fertilizer is added at times and water is provided by rain or supplemental irrigation. Crop plants then transform all these scare inputs applied by the farmer, with the help of sunlight and air from the atmosphere into grains or other products through the biological process of photosynthesis. Similarly, industry managers combine different inputs such as labour, machines, energy, other capital items, and raw materials to produce different products such as textile products, soaps, toiletries, etc.

We can just think of the various products we use. Each requires some set of physical resources (metal, wood, cloth, chemicals, etc), some labour, and some financial arrangement from the production process to occur. Management is also necessary to conceive of the production idea, to assume risks, to make the decision about production and to solve problems related to the firm's production. Therefore, all the inputs used in production are classified into four categories; namely, land labour, capital and management. These are the four elements of the production process.

This topic has separately been discussed in the following article:
4 Factors of Production: Methods, Resources and Inputs

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