Production

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.

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.

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.

Types of Production: Tertiary Production

Tertiary production is the process in which industries involved sell the finished goods produced by secondary industries.

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.

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.

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.