by Production in managerial economics refers to the process of transforming inputs (resources) into outputs (goods and services) that satisfy human wants. A firm uses factors of production such as land, labour, capital, and entrepreneurship to create utility. Production does not only mean manufacturing physical goods; it also includes services like banking, transport, insurance, and education. Therefore, production is essentially the creation of value or utility rather than only the creation of tangible products.
Definition
- According to Nicholson
Production is the process by which inputs are combined, transformed and turned into outputs.
- According to Stigler
Production may be defined as the conversion of resources into commodities and services.
Functions of Production
- Short Run Production Function
The short run production function shows the relationship between output and inputs when at least one factor of production remains fixed, usually capital or plant size. Firms can increase output only by changing variable inputs such as labour or raw materials. Because of limited capacity, production initially increases at a faster rate, but later increases slowly due to the law of diminishing returns. It helps managers decide the efficient level of labour employment in the short period.
- Long Run Production Function
The long run production function represents the relationship between inputs and output when all factors of production are variable. Firms can change machinery, plant size, technology, and labour. There is no fixed factor in the long run. This function helps a firm select the most economical combination of inputs. It is useful for expansion planning, modernization, and investment decisions. Managers analyze long run production to achieve optimum scale and reduce per unit production cost.
- Total Product Function (TP)
Total product refers to the total quantity of output produced by a given quantity of inputs during a specific period. It measures the overall productive efficiency of labour and other factors. As more units of labour are employed, total product first increases rapidly due to specialization and better utilization of fixed factors. Later it increases slowly and may eventually decline. Managers use total product to understand overall productivity and to plan appropriate production levels.
- Average Product Function (AP)
Average product shows the output produced per unit of a variable factor, usually labour. It is calculated by dividing total product by the number of units of labour employed (AP = TP/L). Initially, average product rises due to better division of work and efficient use of resources. After a certain point, it begins to decline due to overutilization of fixed resources. It helps management evaluate labour efficiency and determine the proper workforce size.
- Marginal Product Function (MP)
Marginal product refers to the additional output produced by employing one more unit of a variable factor while keeping other factors constant. It is calculated as the change in total product divided by change in labour (MP = ΔTP/ΔL). Marginal product first increases due to specialization and later decreases because of the law of diminishing returns. It is very important in managerial decisions related to employment of labour and optimal resource allocation.
- Cobb-Douglas Production Function
The Cobb-Douglas production function expresses the relationship between output and two main inputs—labour and capital—using a mathematical form. It is written as Q = A Lᵃ Kᵇ. It shows how changes in labour and capital affect production level. Managers use this function to forecast output, measure productivity, and analyze returns to scale. It is widely used in economics because it provides a realistic explanation of production behavior in many industries.
- Isoquant Function
An isoquant represents various combinations of two inputs that produce the same level of output. It is similar to an indifference curve in consumer theory. Each point on the isoquant gives equal production. The curve slopes downward because one input can substitute another. Managers use isoquant analysis to choose the least cost combination of inputs. It helps in determining efficient resource allocation and selecting appropriate production techniques.
- Expansion Path Function
The expansion path shows the combination of labour and capital a firm will use as it increases output while minimizing cost. It connects points of equilibrium where isoquant curves are tangent to isocost lines. This function helps firms plan long-term growth and capacity expansion. Managers use it to decide how production should grow when demand increases. It also indicates whether the firm should use labour-intensive or capital-intensive production methods.
Types of Production
1. Job Production
Job production refers to the manufacture of a single product according to the specific requirements of a customer. Each product is unique and produced individually. Skilled labour and flexible machinery are required in this type of production. Examples include tailoring, interior decoration, shipbuilding, and custom furniture making. The cost of production is generally high and production takes more time. It is suitable where customer preferences and design specifications differ from order to order.
2. Batch Production
Batch production means producing goods in groups or lots instead of one at a time. A particular product is manufactured in a batch and after completion the machinery is adjusted to produce another batch. It is commonly used in bakeries, pharmaceutical industries, garments, and book printing. It provides some standardization while maintaining flexibility. Cost per unit is lower than job production, but higher than mass production. Proper planning and scheduling are very important in batch production.
3. Mass Production
Mass production involves large-scale production of standardized goods using specialized machines and assembly line techniques. Products are identical and produced continuously in huge quantities. Examples include automobiles, mobile phones, televisions, and packaged food products. It reduces cost per unit due to economies of scale and efficient utilization of resources. However, it requires large capital investment and lacks flexibility because changing product design is difficult once production starts.
4. Continuous (Process) Production
Continuous production is a type of production where goods are produced continuously without interruption. The production process runs day and night, and output flows steadily. It is common in industries like petroleum refining, cement, chemicals, paper, and electricity generation. Highly automated machinery is used and human involvement is limited. The cost of production is very low per unit, but stoppage of the plant can cause heavy losses. It requires careful maintenance and control systems.
5. Unit Production
Unit production means producing a single complete unit at a time, but unlike job production, the design may not be customer-specific. It is used for complex and large products such as aircraft, heavy machinery, bridges, or construction projects. Production takes a long period and requires detailed supervision and coordination. It involves high skill, high cost, and extensive planning. Quality control is very important because each unit represents a large investment.
6. Primary Production
Primary production refers to extracting natural resources directly from nature. It includes agriculture, fishing, forestry, mining, and quarrying. These activities provide raw materials to industries. The output depends heavily on natural conditions like climate, rainfall, and soil fertility. It forms the base of all other economic activities because manufacturing and service sectors depend on it for raw materials.
7. Secondary Production
Secondary production involves processing and transforming raw materials into finished or semi-finished goods. Manufacturing industries fall under this category. Examples include textile manufacturing, steel production, food processing, and automobile manufacturing. It adds value and utility to raw materials and increases their usefulness to consumers.
8. Tertiary Production
Tertiary production includes services that assist both production and consumption. It does not create physical goods but provides services such as transport, banking, insurance, communication, retail trade, and healthcare. It supports primary and secondary production by distributing goods and facilitating business activities.
Factors of Production
- Land
Land refers to all natural resources provided by nature that are used in the production process. It includes soil, rivers, forests, minerals, climate, and water resources. Land supplies raw materials required for industries such as agriculture for food grains, mines for metals, and forests for timber. The supply of land is limited and cannot be increased by human effort. Its productivity depends on fertility, location, and proper utilization. Rent is the reward paid for the use of land.
- Labour
Labour means human physical and mental effort used in producing goods and services. Workers, supervisors, technicians, engineers, and managers all come under labour. The efficiency of labour depends on education, training, health, experience, and skill. Unlike land, labour is a living factor and its productivity can be improved through motivation and incentives. Wages are the reward paid to labour. Labour plays a very important role because machines and capital cannot operate without human effort.
- Capital
Capital refers to man-made resources used to produce other goods and services. It includes machinery, tools, buildings, equipment, vehicles, and technology. Capital is created through saving and investment. It increases productivity by enabling large-scale production and reducing human effort. There are different forms of capital such as fixed capital (machinery), working capital (raw materials), and social capital (roads, electricity). Interest is the reward for capital. Adequate capital is essential for modern industrial development.
- Entrepreneurship (Organisation)
Entrepreneurship is the ability to organize, coordinate, and control all other factors of production. The entrepreneur makes business decisions, arranges finance, hires labour, and selects production methods. He also bears the risk and uncertainty of business. Innovation, leadership, and managerial ability are important qualities of an entrepreneur. Profit is the reward for entrepreneurship. Without an entrepreneur, land, labour, and capital cannot be properly utilized, so entrepreneurship is considered the most dynamic factor of production.
- Technology
Technology refers to the method or technique used in the production process. It includes scientific knowledge, machines, and production techniques that improve efficiency. Better technology increases output with the same amount of resources and reduces production cost. Modern industries depend heavily on advanced technology such as automation and computerization. Improvement in technology leads to economic growth and higher productivity. Though sometimes included under capital, it is treated separately because of its major impact on production efficiency.
- Management
Management involves planning, organizing, directing, and controlling business activities to achieve organizational goals. Managers coordinate labour and capital efficiently and ensure smooth functioning of production. They make important decisions regarding production quantity, quality control, cost control, and resource allocation. Effective management increases productivity and reduces wastage. In modern business organizations, professional management plays a crucial role in achieving success and maintaining competitiveness in the market.
Importance of Production
- Satisfies Human Wants
Production is essential because it provides goods and services required to satisfy human wants. People need food, clothing, housing, education, and transportation for a better standard of living. Without production, these needs cannot be fulfilled. Firms produce commodities to meet consumer demand and improve social welfare. As production increases, availability of goods also increases, leading to better living conditions and comfort for society.
- Basis of Economic Activity
Production is the foundation of all economic activities such as consumption, exchange, distribution, and investment. Consumption depends upon the availability of goods, and goods are available only when they are produced. Trade, commerce, and transportation also exist because products are produced and supplied to markets. Therefore, production acts as the starting point of the entire economic system and drives economic development.
- Increases National Income
Higher production leads to higher output of goods and services, which increases national income and per capita income. When industries produce more, employment rises and wages increase. This improves purchasing power and economic prosperity. Countries with strong production sectors, such as manufacturing and agriculture, generally experience faster economic growth. Therefore, production plays a vital role in the economic progress of a nation.
- Generates Employment
Production activities create job opportunities for workers in factories, offices, transport, and service sectors. Establishment of industries requires labour at various levels such as skilled, semi-skilled, and unskilled workers. Increased production encourages expansion of industries, leading to more employment opportunities. Employment improves income and reduces poverty. Thus, production contributes significantly to solving unemployment problems in an economy.
- Encourages Trade and Commerce
Production promotes trade and commerce because goods produced in one place are exchanged in different markets. Surplus production leads to domestic trade as well as international trade. Export of goods earns foreign exchange for a country and strengthens the economy. Retailers, wholesalers, and transport services develop due to production. Hence, production supports the growth of markets and commercial activities.
- Promotes Industrial Development
Large-scale production encourages the growth of industries and industrialization. Industries require machinery, infrastructure, and technology, which lead to development of related sectors like power, transport, and communication. Industrial development increases productivity and economic strength. Countries with advanced industrial production generally have higher living standards and economic stability. Thus, production is a major driving force behind industrial progress.
- Improves Standard of Living
As production increases, goods become more available and affordable. Consumers get a variety of products such as electronic devices, vehicles, and household appliances. Increased availability reduces prices and improves quality. This raises the standard of living by providing comfort and convenience. Better production also improves healthcare, education, and communication facilities, enhancing overall quality of life.
- Helps in Business Profit and Growth
Production enables firms to earn profit and expand their operations. Efficient production reduces cost per unit and increases sales volume. Higher profit allows businesses to reinvest in technology, research, and expansion. Firms can introduce new products and improve quality. Therefore, production is essential for the survival, stability, and long-term growth of business organizations.
Challenges in Production
- Scarcity of Resources
One of the major challenges in production is the limited availability of resources such as raw materials, skilled labour, and capital. Natural resources like minerals, fuel, and water are not unlimited. Firms must use them carefully to avoid wastage. Scarcity increases production cost and affects output level. Managers must therefore plan efficient allocation and adopt conservation methods to ensure continuous production without exhausting resources.
- Technological Changes
Rapid technological advancement creates both opportunities and problems for firms. Businesses must frequently update machinery and adopt new techniques to remain competitive. However, installing new technology requires heavy investment and skilled workers. Old machines may become obsolete quickly, causing financial loss. Training employees to operate new technology also takes time and cost, making technological change a significant challenge in production management.
- Rising Cost of Production
Increasing prices of raw materials, fuel, electricity, and wages raise the cost of production. When production cost rises, profit margins decline and firms may have to increase selling prices. Higher prices reduce demand and competitiveness in the market. Managers must control costs through efficient resource utilization, better planning, and improved productivity. Cost control is therefore a continuous challenge for business organizations.
- Labour Problems
Labour-related issues such as strikes, absenteeism, low productivity, and lack of skills can disturb the production process. Poor working conditions and dissatisfaction may lead to industrial disputes. Shortage of trained labour also affects product quality and output level. Firms need proper human resource management, training programs, and good industrial relations to maintain smooth production activities.
- Quality Control
Maintaining consistent quality is an important challenge in production. Consumers expect reliable and standardized products. Any defect in quality may damage the firm’s reputation and reduce sales. Firms must implement quality control systems, inspection procedures, and standardized production methods. Ensuring quality while minimizing cost is often difficult, especially in large-scale production.
- Demand Uncertainty
Producers cannot always predict consumer demand accurately. Sudden changes in tastes, preferences, or economic conditions can lead to overproduction or underproduction. Excess production results in unsold stock and storage cost, while insufficient production leads to lost sales opportunities. Therefore, forecasting demand and adjusting production accordingly is a major managerial challenge.
- Infrastructure Constraints
Inadequate infrastructure such as poor transportation, irregular power supply, and weak communication networks affects production efficiency. Delays in supply of raw materials and distribution of finished goods disrupt production schedules. Especially in developing economies, infrastructure limitations increase operating costs and reduce productivity. Firms often need backup arrangements, which further increase expenses.
- Environmental and Legal Regulations
Government rules regarding pollution control, safety standards, and labour welfare impose additional responsibilities on producers. Firms must install pollution control equipment and follow environmental laws. Non-compliance may lead to penalties or closure of operations. Although these regulations protect society and the environment, they increase production cost and require careful managerial planning.
