Production
5.1 Production
Creation of physical product
In common term, production means the creation of a
physical product (such as wheat, rice, camera, computer etc.). According to modern
economists, man can neither produce a physical product, nor can he destruct it.
Man can only alter the form of a physical product to derive utility.
-
Creation of utilities: So, Production implies creation of
utilities. Any activity that makes a product more useful, is called production.
-
Satisfaction
of want: So, production includes
any activity and the provision of any service, which satisfies or is expected
to satisfy a want.
Factors of Production
All goods and services, involved
in the process of production, are called factors of production (like Land,
Labour, Capital, Entrepreneur etc.).
5.2 Land
In common term, land means
the upper surface of earth only. But in economics, land also includes other
free gifts of nature (like mountains, hills water resources, mines, air, light
etc.).
So,
Land consists of all economic wealth and
resources supplied by nature, in their original state.
Features of Land
(i) Free gift of nature: - The supply of land comes
from the nature. No human efforts or sacrifice is needed to produce land.
(ii) Subject to law of
Diminishing Returns: The constant and continuous cultivation of the land with more
application of labour and capital, results in reducing yield from the land.
(iii) Immobile: Land cannot be shifted from
one place to another. So, natural conditions typical to one area cannot be
transferred to some other place.
(iv) Heterogeneous: Land, like the other
factors of production, differs from one another in nature, fertility and
productivity. David Ricardo classifies land as intra-marginal,
sub-marginal and marginal lands.
(v) Limited
in supply: The quantity of land is limited. Its supply can neither be
increased nor decreased by any human effort. Hence, as per economists, land has
no supply price.
5.3 Labour
Labour refers to all those
physical or mental work done to earn money. For example, if a woman cooks in a party for money, her effort
will be called labour, but if the same woman cooks voluntarily (not for money),
her effort will not be called labour.
5.3.1
Features of Labour
(i) Labour
is inseparable from labourer itself: Labour cannot be separated from the labourer. Labourer
has to deliver labour in person being physically present at the place of
production place.
(ii) Labour
is destroyable: The labour power exists as long
as the labourer exists. It disappears when the labourer has to sell his labour
immediately, irrespective of the price. If labour power is not utilised in
proper time, labour is lost.
(iii) Labour
efficiency differs from labourer to labourer: - On the basis of labour power, labourer
may be segregated as skilled, semi-skilled and unskilled. Labour efficiency
depends upon physical strength, education, skill and motivation to work.
(iv) Labour
has low bargaining power: Labourer usually have no reserve, and are compelled
to accept available wages. Moreover, they are also not well organized to
bargain for higher wages due to their poor economical background, and
maldistribution of labour power.
(v) Productivity or efficiency of labour may be
increased: Through motivation, high wage, job security, proper training,
proper division of labour, labour efficiency can be enhanced.
5.3.2 Division of
Labour
Division
of labour is the specialization of activities. It involves splitting up the
production process into its component parts, as per specialized factors on each
sub division, and combining them.
Benefits
of division of labour
(i) Increase
of productivity: When a worker does any work repetitively, he achieves more proficiency and gradually takes lesser
time to complete it. Productivity rises due to reduction in production time.
(ii) Increase
of efficiency: The job is divided as per the ability and skill of workers. The right
person is placed on the right job. Repetition on the task helps the workers
gain efficiency in his job.
(iii) Saves
both time & money: Specialization gradually decreases the time taken to produce the goods.
This causes decrease in the cost of production.
(iv) Large-scale production: Large-scale
production becomes easier through division of labour. This, in turn, leads to decrease
in the cost of production per unit.
Disadvantages
of division of labour
(i) Lack
of freedom:
Division of labour leads to inter dependence of labour, as one type of workers
depends on the other for the entire manufacturing cycle. Delay at any stage
leads to delay of the whole work.
(ii) Job
monotony:
When the worker performs a particular work over and over again, he feels tired
and loses interest in his job due to monotony of work. For this reason, some
companies adopt job rotation among the workers to reduce boredom.
(iii) Risk of unemployment: Since
workers become expert in only one type of work, there is greater risk of
unemployment if they lose their present job. Working in the same line, they
lose skill in diversified job necessary for getting new jobs.
5.3.3 Mobility of Labour
Mobility of labour means the
willingness of labourers to move from one place to another place or from one
job to another job. There are two types of mobility of labour-
- Territorial Mobility: A labourer moves from
one firm to another firm in search of better job.
- Occupational
mobility: A worker
moves from one post to another post in the same industries or from one
industry to another industry on the same post. The curve of occupational
mobility may be vertical or horizontal.
Reasons of mobility of labour
i. Social reasons: Workers change their place
of work due to attachment to a particular area. A worker would always prefer to
work near his native place.
ii.
Job promotion: Workers change their occupation to get better
designation
iii.
Economic reasons: Workers change their place
of work to get better salary and benefits.
iv.
Better working environment: A worker would change his
job to get better working environment.
v.
Job security: A
worker would change job to get more secured job.
vi.
Better future prospects: If a
worker finds better future prospects in a particular job, he would be
interested to get it and change his job.
5.4 Capital
Capital is the part of wealth, which yields or aids in
the production of an income. Capital is used in the process of producing
further wealth.
5.4.1 Characteristics of
Capital
i.
Capital
is productive: Labour with the aid of capital can produce more than it can without it. As
capital is productive, people demand it and are willing to pay money for it.
ii.
Capital
is prospective: People look forward to getting an income by accumulating capital. This
feature explains the supply side by capital.
iii.
Capital
is the result of labour: Tools, machinery, and materials, which are now
utilised for producing goods, which were once the immediate products of labour
working on natural resources. According to John Stuart Mill capital is the
“accumulated product of past labour used for the production of future wealth”.
iv.
Capital
is the result of saving: Production of capital goods implies creation of
goods which cannot be consumed immediately. The reward of such labour (in the
form of final goods) comes at a later time. So capital is considered as “a
single coherent mass of saved-up labour accumulated over time”.
v.
Capital
is non-permanent: Capital has to be reproduced and replenished from time to time.
5.4.2 Types of Capital
(i) Real Capital: Real
capital refers to the capital in physical form, which we can see, and touch
(called material capital). It is directly utilised in production process (like
land, building, machinery etc.)
(ii)
Human capital: Human
capital may be defined as the qualities of labour force, like intelligence
ability, efficiency, character, education, training etc. (also known as
personal capital).
(iii) Social Capital: Social capital may be defined as the capital
owned by a society or a country as a whole, like Roads, rivers, bridges, dams,
etc. (also known as public capital).
(iv) Fixed Capital: Fixed Capital refers to the capital, which
is utilised in the process of manufacture again and again for a long time, like
building, machines, plant, furniture, office equipments etc.
(v)
Circulating capital: Circulating capital means the capital, which
is used only for one time in the process of production, like raw materials etc.
(also known as working capital).
(vi) Productive
capital: Productive capital means
the capital, which is utilised directly in production process, like raw materials,
machinery, fuel and power etc.
(vii) Consumption capital: Consumption
capital means the capital, which is indirectly utilised in production process like
office, staff, canteen, building.
5.4.3 Capital Formation
Capital formation
means increasing the stock of real capital, by raising the level of production
of goods and services. It involves diversion of a part of society’s currently
available resources, for raising the stock of capital goods for expansion of consumable
output in future.
Stages of
Capital Formation:
i. Savings: Saving depends on the income of people. If the income of people is more,
they can also save high. However, there must be necessary intention to save.
ii. Mobilization of Saving: Savings of people need to be mobilised
through banks, post-offices, insurance companies and other financial
institutions to attract large number of people to save.
iii. Investment:
Investment is final stage of capital formation. Banks and other financial
institutions provide the mobilized saving of the public to the entrepreneurs
for production process. This is the stage when the saving changes into capital
goods.
5.5 Entrepreneur
The job of organization of resources is undertaken by a
specific class of individuals in modern industry (called entrepreneurs). The
function of the enterprise/entrepreneur is to expand productive capacity to uplift
standard of living of the people. Entrepreneur attempts to increase production
by bringing together land, labour and capital.
Functions of an
entrepreneur
(i) Planning and
starting the business: The
entrepreneur formulates proper plan and start the business.
(ii)
Risk taking function: The entrepreneur is personally responsible
for any failure in the business. So, it is a risk function as future is
uncertain.
(iii)
Organisation of the business: After starting the business, the entrepreneur
organises the various factors of production like Land, labour, capital etc. and
co-ordinate all the resources.
5.6 Production Function
Production function states the relationship between inputs and output
i.e. the amount of output that can be produced with given quantities of inputs
under a given state of technical knowledge. The output takes the form of volume
of goods or services and the inputs are the different factors of production
i.e. land, labour, capital and enterprise.
Production function can be expressed as the minimum quantities of
various inputs required to yield a given quantity of output. Cost function is associated with product
function.
Formula
Mathematically, the production is described as:
Q = f (x1, x2, x3
……xn)
Where Q is the quantity produced during a
given period of time and (x1,
x2, x3 ……xn) are the quantities of various
inputs used in production.
a.Study of
Production Function
(a)
The production function of a firm can be studied by
holding the quantities of some factors fixed, while varying the amount of other
factors, through the law of variable proportion.
(b)
The production function can also be studied by
varying the amounts of all factors.
(c)
The behaviour of production when all factors are
varied is the subject matter of the laws of returns to scale. The theory of
production or production analysis is also concerned with explaining which combination
of inputs a firm will choose so as to minimize its cost of production.
b.Cobb-Douglas
Production function
(a)
One
of the famous empirically analysed production functions is the Cobb-Douglas
Production Function, which in its original form is applied to the whole of the
manufacturing industry. In this function, there are two inputs, labour and
capital.
(b)
The
mathematical form of the Cobb-Douglas production function is
Q = KLa x C1-a
Where Q is the output, L is the quantity of labour, C is the quantity of
capital and ‘K’ and ‘a’ are positive constants (a < 1).
(c)
The
Cobb-Douglas production function exhibits returns to scale. It says that about
75 per cent of the increase in production is due to labour and 25 per cent is
due to capital.
c. Output
a) Total product: It indicates the amount of a particular product produced by any firm
using both fixed & variable factors of production during any particular
time period e.g. a firm may produce 30 units of a product per day by using one
unit of capital (K) & 3 units of Labour (L). Since the fixed factor (K)
remains unchanged during the short-run, we may call it the total product of a
variable factor. [TPL = Q]
b) Average Product: It implies output per unit of a variable factor. If total product = 30
units & three workers are employed to produce that output, then AP = 30/3,
or APL = Q/L.
c) Marginal Product: It is the rate of change in total product or change in total product
due to one additional change in variable factor. MPL.
d. Returns to a factor
during Short-run
|
Land
(Acres)
|
Labour (No of workers)
|
Total Product
|
Marginal product
|
Average Product
|
|
1st
stage: Increasing returns to a factor
|
||||
|
10
10
10
10
10
10
|
0
1
2
3
4
5
|
0
5
14
30
52
70
|
-
5
9
16
22
18
|
-
5
7
10
13
14
|
|
2nd
stage: Decreasing return to a factor
|
||||
|
10
10
10
10
|
6
7
8
9
|
84
91
96
96
|
14
7
5
0
|
14
13
12
10.6
|
|
3rd
stage: Constraint return to a factor
|
||||
|
10
|
10
|
90
|
-6
|
9
|
e. Distinction between Short
& Long run Production Function
|
Short-run Period
|
Long-run Period
|
|
The time period (which is less than the minimum
required) to bring about changes in fixed factors.
|
The time period in which all factors of
production can be changed.
|
|
Output can be increased by changing variable
factors.
|
Output can be changed by changing both fixed
& variable factors.
|
|
Factors of production can be categorised in two
groups Fixed & variable.
|
Distinction of fixed & variable factors
disappears.
|
|
Demand plays a dominant role in determination of
price of a commodity.
|
Supply can be adjusted according to change in
demand. So demand & supply play equal role in price determination.
|
5.7 Laws of Production
There are two laws
of production
(i)
Laws of
Variable Production
(ii)
Laws of Return to Scale.
Law of Variable
Proportion
Production of a
commodity is the outcome of combined efforts of various factors to production.
These factors of production can be classified as fixed and variable. To enhance
production, quantity of the factors of production will have to be increased.
But the rise in production in respect to a given risks in factors of production
is not always same. Such behaviour is explained by law of return.
Average cost curve is U-shaped
due to law of variable proportions.
Laws of Return to Scale
Prof. Marshall proposed three laws of return namely (1) Law of increasing return (2) Law of
diminishing return. (3) Law of constant
return (4) Law of Negative Return
5.8 Law of Increasing
Returns
When increase of
output leads to a reduction in the cost of production, the law of increasing
returns is said to operate, due to reasons like:
i. The
economies of large-scale production: In large industries
(e.g. steel production) normally increase in the scale of production brings to
various economies, external and internal, and the cost of production falls.
ii. Availability of factor supplies:
If all necessary factors of
production are easily available and can be used in suitable proportions, output
may increase more than in proportion. The cost of production naturally falls.
5.9 Law of Diminishing
Returns
Industries in
which expansion of output leads to increased costs are said to be governed by
the Law of Diminishing Returns. Agriculture is a natural example. When land is
used more intensively with large amounts of labour and capital, the marginal
returns diminish, i.e. marginal costs increase.
If a cultivator
operates on a fixed plot of land and increases his input of labour, keeping all
other factors and the method of cultivation unchanged. He will find that his
output will not increase in proportions to his inputs.
As per Alfred Marshal, the law of Diminishing Returns is
applied to all fields of production.
The law of diminishing returns was
propounded by Ricardo.
Example of Law of Diminishing Returns
|
Man years of
labour
|
Total output (Total Returns in kilograms)
|
Extra output added by the additional unit
of labour (Marginal Returns in kilograms)
|
|
1
|
30
|
30
|
|
2
|
55
|
25
|
|
3
|
75
|
20
|
|
4
|
90
|
15
|
a.Marginal Return
The additional
output obtained from the use of the last increment of an input is called the
Marginal Return. The example shows that the marginal returns are reducing as
the inputs of labour are increasing. The same results will follow if, instead
of labour, any other input is increased under similar circumstances. This is
called the Law of Diminishing Returns.
The Law of Diminishing Returns states that if the input
and the factors of production are increased, the total returns increase but the
marginal returns diminish.
b. Operation of law of diminishing return
i. Scarcity
of productive resources:
If there is a factor of
production, the quantity of which cannot be enhanced easily, the firm will have
to do with the limited quantity of that scarce factor. This will decrease the
productivity of other factors of production. As a result, the law of
diminishing returns will be applicable.
ii. Non-chargeability
of one or more factors of production: If the quantity of only one factor of production is increased and the
quantity of other factors remain fixed, increased quantity of variable factor
will have to work with less quantity of fixed factors. It will decrease the productivity
of variable factors and law of diminishing return will follow.
iii. Surpassing the optimum combination of
factors of production: When the quantity of only one factor of
production is altered keeping the quantity of all other factors constant, an
optimum combination of factors of production is attained. If the quantity of
variable factor is further increased, the law of diminishing return will be
applicable.
5.10 Law of Negative
Returns
It describes the situation in which total product begins
to fall and marginal product becomes negative. In such situation, producer
would stop to increase the quantity of variable factors of production. This
situation begins only after attaining the point of maximum total product. This
situation can be improved by decreasing the quantity of variable factors of
production.
5.11 Law of Constant
Returns
In some industries,
expansion of output produces no economies or diseconomies, and the cost of
production remains the same. Such industries are said to be governed by the law
of constant returns. Sometimes,
expansion of output leads to economics in certain matters and diseconomies in
others. If the economies and diseconomies exactly balance we get constant
returns. In industries, where new firms can come in easily, and the technical
structure of all firms is similar, increase of output will occur by increase in
the number of firms rather than by expansion of individual firms. The total
output will be produced by a large number of firms of optimum size operating at
constant cost.
5.12 Production
optimization
Every manufacturer
wants to achieve maximum production at minimum cost, by setting up an optimum
combination of the factors of production (called product optimization). It is
done by the help of 1)Iso product curves 2) Isoquants or Equal Product Curve, and
3) Iso cost lines.
5.12.1 Iso Product curves
Iso product curves
show different combination of two factors of production with which a firm can attain
equal amounts of product.
Iso-product curve
represents all the possible combination of two factors of production, which
produce equal amounts of production. A producer is indifferent to all these
combinations.
Example
A given output can
be achieved by employing different combinations of factors of production. Let
us assume that a firm can produce 10 units of a commodity by employing any of
the following alternative combinations of two factors ‘x’ and ‘y’.
|
Combinations
|
Units Factor ‘x’
|
Units Factor’y’
|
Output Units
|
|
M
|
9
|
5
|
9x+5y=10
|
|
N
|
7
|
7
|
7x+7y=10
|
|
O
|
5
|
10
|
5x+10y=10
|
|
P
|
3
|
15
|
3x+15y=10
|
|
Q
|
2
|
19
|
2x+19y=10
|
Properties of
Iso-Product Curve
i.
ISO-Product Curves slope downwards to the right
ii.
ISO-Product Curves are convex to the origin
iii.
ISO-Product Curves cannot intersect each other
iv.
An ISO-Product curve lying to the right
represents larger output.
5.12.2
Isoquant or Equal-Product
Curves
An equal product
curve or isoquant shows all the combinations of two inputs, say E and F, which
yields the same level of output.
The concept of equal
product curve can be understood with the help of the given table:
|
Combination
of input
|
Input E
|
Input F
|
Output
|
|
M
|
2
|
16
|
14
|
|
N
|
3
|
12
|
14
|
|
O
|
4
|
8
|
14
|
|
P
|
6
|
4
|
14
|
All the form of combinations M, N, O and P give the same
level of output.
Characteristics of Isoquant
-
Isoquant is also known as production indifference curve.
-
An isoquant slopes downward to the right because a decrease in the
quantity of one factor of production must be associated with an increase in the
quantity of another factor of production so that the same level of production
may be maintained.
-
At equilibrium point a specific isoquant is tangent to an isocost line.
-
Usually isoquants are convex to the origin.
5.13 Economies of scale
5.8.1 Internal Economies
of Scale
(i) Labour Economies: Large-scale production leads to
specialization, which saves time, leads to automation and helps in achieving
“cumulative volume” economies.
(ii) Technical economies: Such economies are related with the ‘fixed
capital’, which includes all types of machinery and other equipment. The
technical economies arise due to (1) specialization (2) set up cost (3) reserve
capacity requirement.
(iii) Marketing economies:
When scale of production increases, the per unit cost of advertisement declines
as a fixed sum amount of money is expended on advertising.
(iv) Managerial Economies: These arise in the form of decentralization,
teamwork, mechanization and adoption of time saving managerial techniques.
5.8.2 Internal
Diseconomies of Scale
(i) Production diseconomies: When inferior or inefficient factors of
production are used, the cost starts rising again.
(ii) Managerial Diseconomies: It operates when the organisation finds it
difficult to control and co-ordinate the activities of all the departments, as the
scale of operation crosses the limit.
(iii) Marketing diseconomies: It operates when the marketing overheads rise
more than proportionately with the increment in output.
(iv) Financial diseconomies: It starts to operate when the financial cost
rises more than proportionate output after the optimum scale, due to more
dependence on external finance.
5.8.3 External Economies
of Scale
(i) Technological Economies: When
the whole industry expands, the demand for improvement in the technology used
in that industry increases. Improvement of existing technology lead to the improvement
of new technology. This technical development causes decrease in the cost of
production.
(ii) Availability of Cheaper Raw Material and
Capital Equipment: When an
industry expands, the demand for the material and capital equipment required by
it also increases. Consequently, the suppliers of the material and capital
equipment attempt to give at lower cost, which decreases the cost of
production.
(iii) Labour Economies: Due to expansion of industry in a particular
area, labour of that area becomes accustomed to do the various production
process of that industry. Consequently, the firms of that industry do not have
to go anywhere to find out efficient labourer. Move the skilled labour decrease
the wastage of material as well as the cost of production.
(iv) Economies of By-products: The expansion of an industry would help the
firms to decrease their cost of production through better usage of wastage
material. The waste material of one firms may be useable as raw materials in
the other firms, thereby enabling to decrease their cost of production.
(v) Better
Infrastructure Facilities: The expansion of an industry may lead to improvement
of the network of infrastructure facilities, such as transportation, banking,
roads, insurance, finance, etc. The development of infrastructural facilities decreases
the cost of product.
