Production Theory

Terms to know 1 Theory of Production Definition of Product Mean of Production Production Function 2 Factors of Production Land and its characteristics Labor and its Characteristics Capital and its kind Entrepreneur and his functions

Product Anything that can satisfy the needs of a customer is known as a Product. Product can be Physical Good: like computer Service: like telecommunication service Places: like land Properties like real estate

Production Transformation of inputs into output is known as Production. Production is the process of conversion of inputs into output. Inputs Land Labour Capital Raw material Machines Methods Procedures Output Goods Services

Efficient Production Process When small input leads to more output, the production process is known as efficient production process. Machines Methods Procedures Output Goods Services Inputs Land Labour Capital Raw material

In-Efficient Production Process When Large input leads to Less output, the production process is known as in-efficient production process. Machines Methods Procedures Inputs Land Labour Capital Raw material Output Goods Services

Production Function: The functional relationship between the inputs and output is known as Production Function. Output = f (factors of Production) Q= f (Land, Labor, Capital, Raw material etc) For example Q = 2LK This production function means that we get twice amount of output of the amount of labor and capital used.

Meaning of FOP Factors of production are the inputs used to produce goods These are Land Labor Capital Organization/Entrepreneurship.

1. LAND Meaning Generally by land we mean soil, but in Economics land refers to all available natural resources which can be used to produce an income. E.g. soil, mountains, seas, minerals etc.

Characteristics of land: Free Gift of nature to a Country. Supply of Land is fixed in Nature: Different characteristics in Different Places Mobility of land is impossible.

2. LABOR Definition Labor is any form of mental or physical work, done for the sake of reward, directed towards the production of goods and services.

Characteristics of Labor: Labor and laborer are in separable Un-identical Weak bargaining position Inverse relationship between supply of labor and wage rate Mobility of labor is limited

Efficiency of Labor: Efficiency of labor means the working capacity of laborer. We can also define efficiency by “Achieving the maximum benefit from a given amount of resources”.

Factors Determining the Efficiency of Laborer Personal characteristics Education and training Wages and attractive benefits Working environment

Types of wages Salary Pay Wages Fee

Types of wages Salary) if a person is highly paid, the numeration are called salary for example the earning of professor, engineer ,General manager named as salary. Pay the amount to the middles class workers such as typist, clerks, called pay

Wage the reward which is paid the inferior type workers, whether, they may skilled or not unskilled is called. Fee fee are earning of independent workers, such as doctors

3. Capital Definition Capital refers to that part of wealth which is used in producing further wealth. E.g. plants and machinery, tools, stock of raw materials etc. That part of money which produce further money is called capital

KINDS OF CAPITAL 1 FIXED CAPITAL Fixed capital consist of the equipment used to increase production e.g. machinery. It is fixed capital that does not change its form in the course of production. 2 CIRCULATING CAPITAL It is the form of capital that can lead to return when fully manufactured. For example Raw Material are changed into finished goods which are then exchanged for money and this is used to buy more circulating capital.

MOBILITY OF CAPITAL Shifting of capital from one place, one industry or one country to another in pursuit of increasing the efficiency of capital is known as mobility of capital. 1 National Mobility of Capital If the capital is moving within an economy it is known as national mobility of capital 2 International Mobility of Capital If the capital is moving from one economy to another economy it is known as inter national mobility of capital

4. ENTREPRENEURSHIP An entrepreneur is the one who combines the factors of production to produce goods and services. OR An entrepreneur is one who takes the risk of producing a product for a profit. And entrepreneurship is the managerial ability and risk taking that contribute so much to a productive economy.

FUNCTIONS OF NTREPRENEUR Planning of business Combines factors of production Responsibility for sale of production Faces uncertainties of future Efficient administration Distribution of rewards to four FOP

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