Get ready to roll up your sleeves and learn everything about production! From making your morning cup of coffee to assembling a car, production is an essential economic concept. But what exactly is the production and why is it so important? In this article, we'll explore the definition of production in economics, the various types of production, and the factors of production from which everything is made. Plus, we'll look at an interesting example of production to help you better understand the concept. So grab a hard hat, and let's get started!
Production in Economics Definition
In simple words, the definition of production is the process in which various inputs, such as land, labor, and capital, are used to produce the outputs in the form of products or services. Each company is diverse and has a particular production strategy, but all businesses strive to combine their inputs in a way that maximizes their profits.
Businesses must take into account several factors when deciding how much to produce to be profitable. Businesses must consider the cost of the inputs utilized in the production process.
The most logical step to take for cost minimization if the company is purchasing raw materials at a high cost is to switch suppliers.
Similarly, firms must also monitor the technology they use for production. Firms might either use labor-intensive factories or capital-intensive factories, depending on which one helps them maximize their profit.
The area in which firms operate helps them to determine which production decision will be beneficial for them. Labor-intensive factories are mostly used in countries with low wages. Likewise, capital-intensive modern factories are used when a high number of laborers is not required or when a firm operates in a country where there are high wages.
- A firm makes three considerations while making production decisions:- Cost of inputs used for production;- Technology used for production;- Area of operation.
Production is the process by which different inputs, including capital, labor, and land, are used to create outputs in the form of products or services.
Want to learn more about production?Check out our articles:- Production Possibility Frontier- Economies of Scope
Importance of Production
What is the importance of production? Production is a crucial component of economics and is essential for any economy to function. Companies use a variety of inputs, such as land, labor, and capital, to create goods or services that are later used by customers. In addition to maximizing the use of resources, production also generates employment opportunities. Lastly, economic efficiency can be attained if the products and services created are delivered to the right customers.
- Importance of Production:- Use of tangible and intangible resources;- Generation of employment;- Economic efficiency.
Example of Production
Let's take a look at an example of production to comprehend the concept in a bit more detail.
Let us suppose that you are the owner of a packaged food manufacturing firm and want to expand your business in a country where the labor wages are low. The most sensible course of action you can take to maximize your profit is to use a labor-intensive factory. As the minimum wages in the area you will operate in are low, doing so would cut costs for the company.
Likewise, you again want to expand your business, but this time to a country with high labor wages. In such a situation, the capital-intensive factory should be used. To further maximize your profit, you can choose a supplier who supplies raw materials at low prices.
Types of Production
Now that we know about production let's learn about the types of production. There are three types of production - primary production, secondary production, and tertiary production. Let's learn about each of them in more detail!
Types of Production: Primary Production
The stage of production where raw materials are produced for the industries is known as primary production. The materials produced in the process of primary production are later utilized by secondary industries in their production process.
Primary production includes processes such as agriculture, mining, fishing, and others.
Types of Production: Secondary Production
Secondary production is the process in which raw materials are converted into finished goods. The secondary industry-produced goods are further utilized by tertiary industries.
Examples of secondary production are manufacturing plants, construction companies, and others.
Types of Production: Tertiary Production
Tertiary production is the process in which industries involved sell the finished goods produced by secondary industries.
Examples of tertiary production are wholesalers and retailers, communication services, and others.
Factors of Production Economics
Now, as you already know a bit about production, let's dive deeper into factors of production and their types that exist in economics.
Factors of production are the tangible and intangible resources that are used by the firm to produce goods and services. A firm's efficiency is measured by looking at how the firm utilizes its factors of production. There are four factors of production, and proper utilization of each of them is significant to a company's continued growth.
- There are four factors of production:- Land;- Labor;- Capital;- Entrepreneurship.
Now, let's understand how the firm utilizes each of them.
Factors of Production Economics: Land, Labor, Capital, and Entrepreneurship
The land is the tangible natural resource that the company uses to make its products. The term 'land' does not only correspond to the land area but represents the overall natural resources, such as rivers, and forests, which are used by businesses. For this reason, the land is also referred to as a natural factor of production.
Laborers are humans who employ both their physical and mental capabilities to contribute to the process of producing a product or a service. Labor is otherwise known as the human factor of production.
Additionally, any business needs a factory or different equipment to operate. Capital refers to these artificial resources that are utilized in the production process.
Lastly, an entrepreneur is someone who combines all of the resources - land, labor, and capital to produce a product or service. Entrepreneurs make decisions regarding the production process and the best way to utilize the factors of production.
The resources that the company uses to produce products and services are known as factors of production.
The resources that have a physical structure and can be touched are tangible.
The resources that lack physical form and cannot be touched or seen are intangible.
In the long run, firms can change all the inputs to maximize their profits, but in the short run, they are unable to change some of the inputs. Let's get straight into the short-term situation when a firm is capable of changing only one input in its production process.
Factors of Production Economics: Production With One Variable Input
One type of production in the short run is when the amount of capital with the firm is fixed, and the labor is variable. Let's take an example of a coffee-producing firm to understand the concept clearly.
| Amount of Labor | Amount of Capital | Total Output |
| 0 | 10 | 0 |
| 1 | 10 | 20 |
| 2 | 10 | 40 |
| 3 | 10 | 90 |
| 4 | 10 | 120 |
| 5 | 10 | 150 |
| 6 | 10 | 150 |
| 7 | 10 | 105 |
| 8 | 10 | 40 |
Table 1 - Production With One Variable Input Example
The amount of output that can be produced by using different quantities of labor and a fixed unit of capital is depicted in Table 1. Initially, additional labor yields a higher amount of output using the existing capital, but after the labor is increased from 5 to 6, the output is constant. Gradually, overall output decreases with a further increase in each unit of labor. Hence, 5 laborers can be more productive than 8 laborers with the existing amount of capital in the coffee firm.
However, if a firm decides to increase its fixed capital from 10 to 15, the output will likely grow along with an increase in labor because the workers will have more capital available to them for the production process.
Factors of Production Economics: Production With Two Variable Inputs
We already understand production using one variable input (labor) and one fixed input (capital). Now, what if both of the inputs used by the firms are variable? When both inputs - labor and capital are variable, firms can choose different combinations of them to generate output. Some firms might use more labor and less capital, and some might prefer more capital and less labor, depending upon what helps them to yield maximum profit.
Fig. 1 - Production with two variable inputs
For example, if a firm is operating in a location where the wage of labor is low, it might prefer using more labor and less capital to drive up its profits. Concerning Figure 1, the firm operating at the lower wage region will use a combination of the L1 level of labor and the C1 level of capital to maximize its profit.
Want to dive deeper into the concept of production?Check out our articles:
- Production costs
- Costs in economics
- Production cost for a firm
Production - Key Takeaways
- Production is the process by which different inputs, including capital, labor, and land, are used to create outputs in the form of products or services.
- Production is important to ensure the efficient use of tangible and intangible resources, the generation of employment, and achieving economic efficiency.
- The resources that the company uses to produce products and services are known as factors of production.
- Four factors of production are land, labor, capital, and entrepreneurship.
- The resources that have a physical structure and can be touched are tangible.
- The resources that lack physical form and cannot be touched or seen are intangible.
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