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MBA. Sem- I PRODUCTION
PRODUCTION
Meaning, Factors and Law of Diminishing Return
©All Right Reserved
Prepared by
ANIL KUMAR SINGH
Assistant Professor; Department of Business Administration
SACHCHIDANAND SINHA COLLEGE, AURANGABAD, BIHAR
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Notes by Prof. ANIL KUMAR SINGH Ph: 9471838900
MBA. Sem- I PRODUCTION
INTRODUCTION TO PRODUCTION
Production is an important economic activity which satisfies the wants and needs of the people.
Production is the method of turning raw materials or inputs into finished goods or products in a
manufacturing process. In other words, it means the creation of something from basic inputs.
Production may also refer to the goods being produced. For instance, some business call a set of
products being produced at the same time a production run.
In economics, Production is a process of transforming tangible and intangible inputs into goods or
services. Raw materials, land, labour and capital are the tangible inputs, whereas ideas, information
and knowledge are the intangible inputs. These inputs are also known as factors of production.
DEFINITION OF PRODUCTION
According to James Bates and J.R. Parkinson - ‘Production in Economics can be defined as an
organised activity of transforming physical inputs (resources) into outputs (finished products), which
will satisfy the products’ needs of the society’.
According to J.R. Hicks – ‘Production in Economics is an activity whether physical or mental, which is
directed to the satisfaction of other people’s wants through exchange’.
CONCEPT OF PRODUCTION
Production in Economics can be defined as the process of converting the inputs into outputs. Inputs
include land, labour and capital, whereas output includes finished goods and services.
In other words, Production in Economics is an act of creating value that satisfies the wants of the
individuals.
Organisations engage in production for earning maximum profit, which is the difference between the
cost and revenue. Therefore, their production decisions depend on the cost and revenue. The main
aim of production is to produce maximum output with given inputs.
NATURE OF PRODUCTION
1. Production implies the making of a commodity or the supplying of a Service.
2. It is different from Creation.
3. As the saying goes “God creates but man produces”
4. Creation implies the production of something out of nothing.
5. Production on the other hand refers to the making of a Commodity or Service out of something
else.
TYPES OF PRODUCTION
For Study purposes, It is necessary to classify production into three main group:
1. Primary Production : Primary production is carried out by ‘extractive’ industries like agriculture,
forestry, fishing, mining and oil extraction. These industries are engaged in such activities as
extracting the gifts of Nature from the earth’s surface, from beneath the earth’s surface and from the
oceans.
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Notes by Prof. ANIL KUMAR SINGH Ph: 9471838900
MBA. Sem- I PRODUCTION
2. Secondary Production : This includes production in manufacturing industry, viz., turning out semi-
finished and finished goods from raw materials and intermediate goods— conversion of flour into
bread or iron ore into finished steel. They are generally described as manufacturing and construction
industries, such as the manufacture of cars, furnishing, clothing and chemicals, as also engineering
and building.
3. Tertiary Production : Industries in the tertiary sector produce all those services which enable the
finished goods to be put in the hands of consumers. In fact, these services are supplied to the firms in
all types of industry and directly to consumers. Examples cover distributive traders, banking,
insurance, transport and communications. Government services, such as law, administration,
education, health and defense, are also included.
FACTORS OF PRODUCTION
Types of Production in Economics are the inputs that are used for producing the final output
with the main aim of earning an economic profit.
There are four main factors of production. Each and every factor is important and plays a
distinctive role in the organization. Factors of production include resource inputs used to
produce goods and services. Economist categories input factors into four major categories such
as Land, Labour, Capital and Enterprise/organization.
LAND
FACTORS OF LABOUR
PRODUCTION
CAPITAL
ENTERPRISE
Factors of Production
1. LAND: In ordinary sense ‘land’ refers to the soil or the surface of the earth or ground. But,
in Economics, land means all gifts of Nature owned and controlled by human beings which yield
an income. Land is the original source of all material wealth. The economic prosperity of a
country depends on the richness of her natural resources. The quality and quantity of
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Notes by Prof. ANIL KUMAR SINGH Ph: 9471838900
MBA. Sem- I PRODUCTION
agricultural wealth are determined by the nature of soil, climate and rainfall. The agricultural
products are the basis of trade and industry. Industry survives on the availability of coal-mines
or waterfall for electricity production. Hence, all aspects of economic life like agriculture, trade
and industry are generally influenced by natural resources which are called as “Land” in
economics. In other words, land includes not only the land surface, but also the fish in the sea,
the heat of the sun that helps to dry grapes and change them into resins, the rain that helps
farmers to grow crops, the mineral wealth below the surface of the earth and so on.
CHARACTERISTICS OF LAND
· Land is a primary factor of production.
· Land is a passive factor of production.
· Land is the free gift of Nature.
· Land has no cost of production.
· Land is fixed in supply. It is inelastic in supply.
· Land is permanent.
· Land is immovable.
· Land is heterogeneous as it differs in fertility.
· Land has alternative uses.
· Land is subject to Law of Diminishing Returns.
2. LABOUR: Like land, labour is also a primary factor of production. The distinctive feature of
the factor of production, called labour, is that it provides a human service. It refers to human
effect of any kind—physical and mental— which is directed to the production of goods and
services. ‘Labour’ is the collective name given to the productive services embodied in human
physical effort, skill, intellectual powers, etc. The supply of labour is affected by the change in
its prices. It increases with an increase in wages. The return for labour is called wages and
salary.
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Notes by Prof. ANIL KUMAR SINGH Ph: 9471838900
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