CH # 5

Production Theory

Production Theory

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MICRO Economics

Terms to knowTerms to knowTerms to knowTerms to know

Theory of Production1

Factors of Production2

- Definition of Product

- Mean of Production- Production Function

- Land and its characteristics

- Labor and its Characteristics

- Capital and its kind- Entrepreneur and his

functions

MICRO Economics

ProductProduct

Anything that can satisfy the needs of a customer is known as a Product.

Product can be Physical Good: like computer Service: like telecommunication service Places: like land Properties like real estate

MICRO Economics ProductionProduction

Transformation of inputs into output is known as Production.

Production is the process of conversion of inputs into output.

Inputs-Land-Labour-Capital-Raw material

•Machines•Methods•Procedures

Output-Goods-Services

MICRO Economics Efficient Production ProcessEfficient Production Process

When small input leads to more output, the production process is known as efficient production process.

Inputs-Land

-Labour-Capital

-Raw material

•Machines•Methods•Procedures

Output-Goods-Services

MICRO Economics In-Efficient Production ProcessIn-Efficient Production Process

When Large input leads to Less output, the production process is known asin-efficient production process.

Inputs-Land

-Labour-Capital

-Raw material

•Machines•Methods•Procedures

Output-Goods-Services

MICRO Economics Production Function:Production Function:

The functional relationship between the inputs and output is known as Production Function.

Output = f (factors of Production)

Q= f (Land, Labor, Capital, Raw material etc)

For example Q = 2LK

This production function means that we get twice amount of output of the amount of labor and capital used.

MICRO Economics Meaning of FOPMeaning of FOP

Factors of production are the inputs used to produce goods These are

Land Labor Capital Organization/Entrepreneurship.

MICRO Economics 1. LAND1. LANDMeaning

Generally by land we mean soil, but in

Economics land refers to all available natural

resources which can be used to produce an

income. E.g. soil, mountains, seas, minerals

etc.

MICRO Economics Characteristics of land:Characteristics of land:

Free Gift of nature to a Country.

Supply of Land is fixed in Nature:

Different characteristics in Different Places

Mobility of land is impossible.

MICRO Economics 2. LABOR2. LABOR

Definition

Labor is any form of mental or physical work,

done for the sake of reward, directed towards

the production of goods and services.

MICRO Economics Characteristics of Labor:Characteristics of Labor:

Labor and laborer are in separable Un-identical Weak bargaining position Inverse relationship between supply of

labor and wage rate Mobility of labor is limited

MICRO Economics

Efficiency of Labor:Efficiency of Labor:

Efficiency of labor means the working capacity of laborer.

We can also define efficiency by

“Achieving the maximum benefit from a given amount of

resources”.

MICRO Economics

Factors Determining theEfficiency of Laborer

Factors Determining theEfficiency of Laborer

1 Personal characteristics

2 Education and training

3 Wages and attractive benefits

4 Working environment

MICRO Economics Types of wages Types of wages

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MICRO Economics Types of wagesTypes of wages

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MICRO Economics

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MICRO Economics 3. Capital3. Capital

Definition

Capital refers to that part of wealth which is

used in producing further wealth. E.g. plants

and machinery, tools, stock of raw materials

etc.

That part of money which produce further

money is called capital

MICRO Economics KINDS OF CAPITALKINDS OF CAPITAL

1 FIXED CAPITALFixed capital consist of the equipment used to increase production e.g. machinery. It is fixed capital that does not change its form in the course of production.

2 CIRCULATING CAPITALIt is the form of capital that can lead to return when fully manufactured. For example Raw Material are changed into finished goods which are then exchanged for money and this is used to buy more circulating capital.

MICRO Economics MOBILITY OF CAPITALMOBILITY OF CAPITALShifting of capital from one place, one industry or

one country to another in pursuit of increasing the efficiency of capital is known as mobility of capital.

1 National Mobility of CapitalIf the capital is moving within an economy it is known as national mobility of capital

2 International Mobility of CapitalIf the capital is moving from one economy to another economy it is known as inter national mobility of capital

MICRO Economics 4. ENTREPRENEURSHIP4. ENTREPRENEURSHIP

MICRO Economics FUNCTIONS OF NTREPRENEURFUNCTIONS OF NTREPRENEUR

Planning of business

Combines factors of production

Responsibility for sale of production

Faces uncertainties of future

Efficient administration

Distribution of rewards to four FOP

CH # 5

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