Theory of Production
THEORY OF PRODUCTION
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Introduction
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Production Theory is the
study of production
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In other words we can say that it is the
study of economic process of converting inputs into outputs
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For an example
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Inputs
§ Land
§ Labour
§ Capital
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Outputs
§ Cars
§ Houses
§ Food
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The process of production includes
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Raw material
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Production line cutting
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Production line sewing
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Finished goods warehouse
Product
Function and Factors of Production
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Product Function
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It is the functional relationship between
Inputs & Outputs
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It connects factors inputs used in the
production function and the level of outputs
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Q=f (L,K)
§ Q (Output)
§ L (Labour)
§ K (Capital)
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Factors of Production
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Land
§ Part of the earth’s surface that is not covered by the
water and used in business production
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Labour
§ Aggregate of all human physical & mental efforts used
in the creation of goods
o
Capital
§ Financial assets such as Cash, Machinery etc
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Organization
§ Arrangement of people in a specific place for specific
purpose during a period of time
Types,
Concept of Production and Conclusion
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Types of Production
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Short Run
§ In this type the Land, Capital and Organization are fixed
while the Labour is variable
§ Its time period is one year or less
§ Example can be the Seasonal industry like Ice factory
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Long Run
§ In this type all factors of production are variable
§ Its time period is more than one year
§ Example can be the Textile industry
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Concepts of Production
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Total Product
§ It is the total output produced by employing all units of
inputs
§ T.P = (Output units produced/Input
used)
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Marginal Product
§ Net addition to the total product by employing an
additional unit of input
§ MPL = (dTP/dL)
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Average Product
§ Output per unit of input is called average product
§ APL = (TP/L)
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Conclusion
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Production theory play a vital role in the success
of any organization
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It helps in pricing of product
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It tells us about the cost of factors of
production
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