Economics and Management - Theory of Production

Satisfaction of human wants is the main objective of all economic activities. Human wants are satisfied with material and non-material goods. Consumption is possible only when these material and non-material goods are available. That activities which makes goods available is called production. It is production that makes available wealth in the forms of goods and service for consumption. That unit which is engaged in the fact of Production is called a firm or a producer.

- Production Function :- Production function expresses the physical or technical relationship between the quantity of good produced and the factors of Production necessary to produce it.
Types of production function :-

1. Production function due to change in factor proportion.
2. Production function due to change in scale.
3. Production function due to change in factor proportion and scale.

Laws of Production :- Output of any good depends upon the quantity of inputs and techniques of Production. If a producer desires to change the amount of his output, he can do so by making a change in his inputs. When a producer effects a change in his production by increasing or decreasing only one factor of Production and as a result there is a change in the proportion of combination of factors of production, then this proportional relationship between production and factors of Production (inputs) is refered to as Law of Variable Proportions or Law of Returns to a factor.

- Fixed Inputs or Factor of Production :- A fixed Inputs or factor of Production is defined as one, the quantity of which can not be changed in the short run as the level of output changes. Some examples of fixed inputs are plants , major equipments, buildings , service of management and supply of skilled labour.

- Variable Input or Factor of Production :- A variable input or factor of Production is defined as one the quantity of which may be changed in the short run as the level of output changes. Some examples of variable inputs are raw materials and labour services.

- Time Period :- It may be worth noting that fixity or variability of inputs or factors depends upon period of time available for the adjustment of inputs in accordance with the changes in output. Economists divide this period of time mainly into two parts :-

1) Short - Period or Short - Run :- Short - run is defined as that period of time in which one or more factors of Production or inputs are fixed and others are variable.

2) Long - Period or Long - Run :- Long - Period or Long - Run is defined as that period of time in which all factors of production or inputs are variable.

Returns to a Factor :- A producer may effect a change in his production by changing only the variable factor , other factors and technology remaining constant. Consequently , there is a change in the proportion of combination of factors of production. This proportional relationship between production and variable factor of production is termed as return to a factor. These , returns to a factor exhibit three phases :-

1) Increasing Returns to a Factor :- Increasing return to a factor refers to a situation in which each additional unit of the variable factor adds more to the firms output and marginal product of the variable factor rises as more of it is used.

2) Constant Returns to a Factor :- Constant returns to a factor refers to a situation in which additional units of a variable factor add the same amount to the firms output and the marginal product of the variable factor is constant.

3) Diminishing Returns to a Factor :-    Diminishing Returns to a Factor refers to a situation in which each additional unit of a variable factor adds less to the firms output , and the marginal product of the variable factor falls as more of it is used.