Production Definition in Economics

In this article we will discuss about:- 1. Definition of Production in Economics 2. Types of Production 3. Agents 4. Factors.

Definition of Production in Economics:

Production in ordinary sense means creation of a commodity. We say the carpenter has produced the chair. But in Economics it is a wrong view. The carpenter has given shape to the wood which is a free gift of nature as a result of which it has become more useful to us than before. He has strictly speaking, created additional utility. So production in Economics means creation of new utility. Man takes the things given by nature and simply gives it a new form so that it becomes more useful to us than before.

Man may create additional utility in at least three ways:

(a) By changing the form of an object of nature, viz., iron ore into steel, wood into furniture. It is known as form utility.

(b) By changing the place, i.e., transferring a thing from the place of abundance to the place of scarcity. It is called place utility.

(c) Utility may be increased by transferring a thing from one time to another, i.e., when it is relatively abundant to a time when it is scarce. It is what is known as place utility.

Production requires co-operation of certain factors. These are known as agents of production. Broadly, there are four such agents, namely, land, labour, capital and organisation. Land includes both manual and intellec­tual labour. Capital is produced means of production.

Organisation is a broad term. It is the factor that faces all the challenges and hazards of production. It pilots the ships of production unit through storm and strain. Factors of production may again be classified into two categories- fixed factors and variable factors.

The former include those factors whose quantity cannot be changed in the short run such as capital goods. The cost incurred for such factors is known as fixed cost or supple­mentary cost. There are some other factors the quantity of which must vary with the level of output, e.g., raw materials cost, casual labour costs, etc. In the long run all factors are likely to be variable.

Different Types of Production:

Since the purpose of any economic activity is the satisfaction of human wants, any activity which helps to satisfy wants is defined as production. In order to survive man must consume; in order to consume he must produce.

In fact, consumption needs determine production plans, and the actual production satisfies those original consumption needs. This, in short, is the economic cycle.

To quote Adam Smith:

“Consumption is the sole end purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer”.

Since the primary purpose of economic activity is to produce utility for individuals, we count as production during a time period all activity which either creates utility during the period or which increases ability of the society to create utility in the future. Simply put, the making of goods and providing services is known as production.

Those providing services ensure that wants are met and goods are sold in the form, at the time, and when and where they are required. A dentist is just as productive in economic terms as a farmer, as both fulfil needs and get paid for doing so. Thus, any paid employment which arises from the supply of raw materials to the consumption of a good or service may be considered as productive.

Direct production refers to a worker supplying his own needs, i.e., self-sufficient, subsistence farming. In modern society, nearly all production is indirect with people producing goods and services for others.

There are three aspects (components) of the production process, viz., inputs (or factors of production), output (saleable goods having utility or want-satisfying capacity) and technology (the art or method of production). Services are also considered as being produced. Inputs are the beginning of the production process and output is the end of the process. Technology lies at the intermediate stage of the whole process.

The producing unit is either the agricultural farm or the (industrial) factory. Business firms are important components (units) of the economic system. They are artificial entities created by individuals for the purpose of organising and facilitating production. It is a technical unit in which inputs are converted into output.

The essential characteristics of the business firm is that it purchases factors of production such as land, labour, capital, intermediate goods, and raw material from households and other business firms and transforms those resources into different goods or services which it sells to its custom­ers, other business firms and various units of the government as also to foreign countries.

Wipro, for example, produces computers for sale to doctors, lawyers, journalists, other firms and State and Central government departments and organisations. Similarly, Coal India Ltd. (which is a public sector unit) produces coal for sale to households, steel plants, power plants, railways and steamship companies. A certain portion of a firm’s output may also be exported.

Importance of exchange:

So, from our above definition it is clear that, many valuable activities such as the work done by families in their own houses and gardens (the so-called do it yourself exercise) and all voluntary works (such as free coaching, free nursing, collection of subscription for a social cause such as flood-relief or earthquake-relief) immensely add to the quality of life but there is no practical way of measuring their economic worth (value).

This being so, and because in economics an important task is to measure changes in the volume of production, it is necessary to add the qualifying clause, ‘through ex­change’, i.e., in return for money, to the definition of production.

Both goods and services:

In short, production, in economics, is taken to include the production of both goods and services. Since people pay for the services (of doctors, teachers, lawyers, accountants, athletes, etc.) the term ‘production’ is to be used in broad sense to include both commodities and services. In the language of G. F. Stanlake, “Production must be understood therefore as comprising all those activities which provide the goods and services which people want and for which they are prepared to pay a price.”

Commodities are not actually created; production is basically concerned with changing the form of things, changing raw materials into finished articles, changing substances by chemical action, assembling many small parts to make (say) a watch or a motor car etc.

Since the economist does not regard the process of produc­tion as complete until a commodity has reached the person who wishes to make use of it, production includes the commercial services of distribution — transport, whole-selling, retailing, etc. and the holding of stocks of things (i.e., inventories) in warehouses until they are required.

Types of Production:

For general purposes, it is necessary to classify production into three main groups:

1. Primary production:

Primary production is carried out by ‘extractive’ industries like agriculture, forestry, mining and oil extraction. These indus­tries are engaged in such activities as extracting the gifts of Nature from beneath the earth’s surface and from the oceans. Primary activities refer to such things as extraction of raw materials from the earth’s surface, e.g., coal mining or pisiculture (fishing). In advanced countries, the primary sector is providing less employment because machinery is replacing man power.

2. Secondary production:

This includes production in manufacturing industry, viz., turning out semi-finished and finished goods from raw materials and intermediate goods — conversion of flour into bread or iron ore into finished steel. These activities are generally described as manufac­turing and construction industries, such as the manufacture of cars, furnishing, clothing and chemicals, as also engineering and building. In short, secondary production is concerned with conversion of raw mate­rials into finished products, e.g., manufacturing motor cars, shirts, medicines, food, etc.

3. Tertiary production:

Industries in the tertiary sector produce all those services which enable the finished goods to be put in the hands of consum­ers. In fact, these services are supplied to the firms in all types of industries and directly to consumers. Examples cover distributive traders, banking, insurance, transport and communications. Government services, such as law, administration, education, health and defence, are also included.

Serv­ices provided by the tertiary sector are essentially of two types:

(a) Commer­cial services; and,

(b) Social services.

(a) Commercial services:

There are various examples of such services. For example, an estate agent selling a house, a car mechanic mends a vehicle. These types of services are increasing in volume and importance as people are becoming more and more service-oriented. Thus, luxury serv­ices, such as eating out at restaurants and playing golf, are becoming more popular.

(b) Social services:

These services are provided free or subsidised at a cheap rate, because the government thinks these are desirable. These are not provided in order to make a profit, but to meet an important need. Exam­ples are medical treatment, and services such as these have increased because the government wants more should be provided.

Agents of Production:

Production in ordinary sense means creation of a commodity. We say the carpenter has produced the chair. But, in Economics it is a wrong view. The carpenter has given shape to the wood which is a free gift of nature as a result of which it has become more useful to us than before.

He has strictly speaking, created additional utility. So, production in Economics means creation of new utility. Man takes the things given by nature and simply gives it a new form so that it becomes more useful to us than before.

Man may create additional utility in at least three ways:

(a) By changing the form of an object of nature, viz., iron ore into steel, wood into furniture. It is known as form utility.

(b) By changing the place, i.e., transferring a thing from the place of abundance to the place of scarcity. It is called place utility.

(c) Utility may be increased by transferring a thing from one time to another, i.e., when it is relatively abundant to a time when it is scarce. It is what is known as place utility.

Production requires cooperation of certain factors. These are known as agents of production. Broadly, there are four such agents, namely, land, labour, capital and organisation. Land includes both manual and intellec­tual labour. Capital is produced means of production.

Organisation is a broad term. It is the factor that faces all the challenges and hazards of production. It pilots the ships of production unit through storm and strain. Factors of production may again be classified into two categories — fixed factors and variable factors. The former include those factors whose quantity cannot be changed in the short-run, such as capital goods.

The cost incurred for such factors is known as fixed cost or supple­mentary cost. There are some other factors the quantity of which must vary with the level of output, e.g., raw materials cost, casual labour costs, etc. In the long run all factors are likely to be variable.

Factors of Production:

Production in ordinary sense means creation of a commodity. We say the carpenter has produced the chair. But, in Economics, it is a wrong view. The carpenter has given shape to the wood which is a free gift of nature as a result of which it has become more useful to us than before. He has, strictly speaking, created additional utility. So, production in Economics means creation of new utility. Man takes a thing given by nature and simply gives it a new form so that it becomes more useful to us than before.

Man may create additional utility in at least three ways:

(a) By changing the form of an object of nature, viz., iron ore into steel, wood into furniture. It is called form utility,

(b) Utility can also be created by changing the place, i.e., transferring a thing from the place of abundance to the place of scarcity. It is called place utility,

(c) Finally, utility may be increased by transferring a thing from one time to another — when it is relatively abundant to a time when it is scarce. It is what is known as time utility.

Production requires cooperation of certain factors. These are known as agents of production. They are also called economic resources or inputs. Broadly, there are four such agents, namely, land, labour, capital and organ­isation. Labour includes both natural and intellectual labour. Capital is produced means of production. Organisation is a broad term. It is the factor that faces all the challenges and hazards of production. It pilots the ship of production unit through storm and strain.

Factors of production may again be classified into two categories — fixed factors and variable factors. The former include those factors whose quality cannot be changed in the short-run such as capital goods. The cost incurred for such factors is known as fixed cost or supplementary cost. There are some other factors the quantity of which must vary with the level of output — e.g., raw materials cost, casual labour costs, etc. In the long-run all factors are likely to be variable.

All productive processes require the above four factors in varying pro­portions.

Land:

Land in the economic sense is the natural resources of this planet. It is not only land itself but also what lies under the land (like coal and gold), what grows naturally on top of the land (forests, wild animals), what is over the land (like the air) and what is around the land in the seas and oceans and under the seas and oceans (like fish and oil).

Only one major resource is for the most part free — the air we breathe. The rest are scarce, because there are not enough natural resources in the world to satisfy the demands of consumers and producers. A natural resource covers all ‘free gifts of nature’, e.g., earth, trees, flat land, sea, rivers, etc. Land can be bought or rented, but it is necessary before production can be started. The owners of land receive rent for its use.

Labour:

Labour is the human input into the production process.

Two important points are to be remembered about labour as a resource:

(1) Just because a person has not got a paid job, it does not mean that he or she does not produce goods and services;

(2) Not all labour is of the same quality.

Some workers are more productive than others because of the education, training and experience they have received. This is called human capital. The greater the human capital of a worker the more productive he or she will be workers of every type in every kind of activity from surgeons to shop assistants represents human resources.

Different jobs require different lev­els of strength, skill, education and different types of responsibility. The bigger the organisation then usually the wider is the variety of human work required. Labour is ‘owned’ by individuals who sell it to firms and receive wages/salaries in return.

Capital:

Capital is a man-made resource, e.g., machinery, a lorry or a robot. It is used to make consumer goods and services. Without capital, there would be no production. Capital goods are those things which human beings have produced, in order to create other goods and services. Capital goods are the creators of other goods and the demand for capital goods is a derived demand.

A modern industrialised economy possesses a large amount of capital and it is continually increasing. Increases to the capital stock of a nation are called investment. This capital is sometimes called physical capital or non-human capital in order to distinguish it from human capital.

Usually capital and labour are combined. Capital lasts a long time but eventually needs replacing. When its value declines with age, it is said to be ‘depreciating’. Some industries are labelled as ‘capital-intensive’ in that they have few labour costs and rely heavily on automated machinery, e.g., the chemical industry. The money borrowed to provide capital is paid interest.

Enterprise:

It is another human resource. This factor refers to the organ­ising, planning and risk-taking by the owner of a business. An entrepreneur is an individual who risks his own resources (money in most cases) in a business venture; and who organises the business — i.e., organises the other three factors of production. An entrepreneur is a special type of worker.

Many economists agree that the entrepreneur should be classed as part of the factor ‘labour’. He receives profit for his work, and is called the entre­preneur. However, in modern economies large businesses are seldom owned by one person; instead they are owned by many shareholders and controlled by a Board of Directors.

Not all enterprises aim to make a profit. Also some nationalised indus­tries operate in order to provide a service rather than to make a profit.

Factor Mobility:

One characteristic of productive factors of considerable impor­tance is their mobility. Factor mobility refers to the extent to which (or ease with which) factors of production can move from one occupation to another or one region (geographic area) to another in response to changes in market conditions (factor prices).

Factor mobility is important for two reasons:

(1) Firstly, factor mobility influences business decision-making, particularly when there is some change in consumer demand conditions calling for adjustment.

(2) Secondly, changes in the character of national product (GNP) largely depend on the degree of factor mobility.

Such mobility is of following two types:

1. Geographic Mobility:

The simplest aspect of mobility is geographical. It refers to movement of a factor from one area (region) to another.

It may be observed that some factors like raw materials and small items of equipment can move freely from one place to another (or one country to another if, of course, there is no government restriction) in response to needs, while others are much less able to do that. In the extreme case of land mobility is, of course, zero. Labour occupies an intermediate position. People can, at least in principle, settle almost anywhere, though there is often strong social resistance to uprooting.

2. Occupational Mobility:

A second aspect of factor mobility is occupa­tional. It is concerned with the mobility of a factor from one occupation (industry) to another or from one use to another. It is often important (and interesting) to know how easily a factor such as labour can shift from, say, motor vehicles to bicycle production or land from growing wheat to grazing cattle. However, two generalizations may be made in this context.

Factors mobility depends on time and cost:

(a) Time:

Firstly, factors tend to become mobile in the long run than in the short run.

(b) Cost:

Secondly, there is frequently a cost involved in moving.

Let us consider labour as an example. If industries in one part of the country decline, it is unlikely that people will immediately leave the area. However, with the passage of time more and more workers will tend to move. Moreover, various costs are incurred in such a move. Houses and flats are needed in areas of expansion. There are psychological costs, too, such as disturbances to family life.

One final point may be noted. Sometimes, the government deliberately erects certain barriers to mobility. For example, certain jobs are reserved for special categories of people (such as retired army personnel, scheduled caste and scheduled tribe candidates).