Table of Contents
What is Production?
To non-economists, production may only mean the creation (or making) of tangible goods. For example, making things like chairs or radios. Production in business is the system of turning raw materials into finished products in the process of manufacturing. Also, it is the end result of a final product of manufacturing processes. It also means creating something from basic inputs (factors of production). The production also means the manufacturing of tangible goods just the way a layman views it to be.
Economists call business firms that manufacture goods producers. Firms or companies that create finished products and sell them to their customers.
Therefore, production in Economics is the act of creating utility. It is the creation of wealth in form of producing commodities and the provision of services that are capable of satisfying human wants. We can describe it as any human effort that leads to the satisfaction of human wants. The rate at which produced goods and services satisfy human wants and needs is an acceptable measure of economic wellbeing.
Presently, companies manufacture goods and they lean towards the trend of outsourcing these capacities. This is in such a way that they do not need to perform it by themselves.
For example, a roofing company may distribute roofing sheets as their product. Meanwhile, a different organization abroad is the producer or manufacturer of these roofing sheets. Also, the intangible act of investigating ideas for the formation of products forms a part of the production processes.
The term, therefore, involves the combination of different material inputs and immaterial inputs (such as plans, technical know-how, etc.) to create output for consumption. Improving the quality-price ratio of products and services and increasing income from an efficient and growing market to total production help to increase a country’s gross domestic product (GDP)
Types of production
We have two major types of production – direct and indirect production.
This has to do with producing goods and services by individuals for the purpose of family use and/or consumption. It is usually on a small scale and the primary purpose is not for sale but for immediate consumption.
This is the act of producing goods and services on a large scale. It is important to classify indirect production into three major types (also known as systems or modes of production). We can as well classify industries accordingly, in a wider sense here to mean the areas of human activities.
a) Primary production
Primary industries carry out this activity such as agriculture, mining, oil extraction, etc. We can also refer to primary industries as extractive industries or extractive occupations. These industries engage in such activities of extracting gifts of nature from the surface of the earth, underneath the earth’s surface, and from the oceans and seas. This activity is basically to provide food and raw materials.
b) Secondary production
Secondary industries/occupations carry out this activity. This has to do with transforming the raw materials that primary industries produced into finished products. The secondary activity consists of all forms of manufacturing and constructive work. Examples include cement production, bridge and road construction, building, brewing of beer, etc.
We can also say that this activity is the conversion of raw materials and intermediate goods to semi-finished and finished products.
c) Tertiary production
This is the activity in which tertiary industries carry out with the aim of enabling the finished products to reach the hands of the consumers. Firms in all types of industries directly receive these services as well as the final consumers. Tertiary industries provide services such as transportation, banking, insurance, legal services, medical services, etc. Examples also include government services such as administration, education, and defense.
The 3 types of production
Aside from the two major categories of production (direct and indirect), some scholars have stated that there are three main types of production. They stated that business managers decide the best production methods for running their businesses. Production is all about creating goods and services and managers decide the most efficient way to organize their inputs for a particular product.
This is where firms produce items individually and they make sure that they finish each item before starting the next one.
This is where they make a group or groups of items together. They finish each batch before starting the next batch. For example, a bakery first produces a batch of fifty white loaves of bread. After baking fifty white loaves of bread, it will start baking fifty loaves of chocolate bread.
Flow production refers to where firms produce identical, standardized items on an assembly line. For example, they produce most cars (in mass) in large factories using conveyor belts and machines like robot arms. Here, workers have specialized jobs.
Importance of production
Increase in standard of living
Increased production leads to increased consumption. The higher the level of consumption, the higher the standard of living of the people in an economy. One vital economic policy in any country is to increase production thereby enhancing economic welfare. When an economy produces more goods and services, the material welfare of the people increases proportionately. This is a major factor that improves the standard of living in a particular jurisdiction.
Provision of employment opportunity
It reduces the adverse effects of unemployment because people are able to find something doing. Larger/expanding firms may need more hands to manufacture goods on large scale. This will provide employment opportunities for those who were initially idle.
Availability of goods and services
As we can see in the definition, production involves the creation of goods and services. This implies that if no one produces anything, there will be no goods or services available to consumers. So whatever that never existed initially, we produce them. In other words, we make them be or make them available to others as the needs arise.
Increase in export potentials
A productive economy has a higher chance of exporting its products. In other words, the economy’s export potentials increase thereby having a higher chance of revenue generation. For example, when a country is not known to be productive, it has nothing to export to other countries.
Increase in wealth
The production helps to increase the wealth of the people. This means that the producer obtains money or generates profits from the sales of his products. He can then use this money to buy what he does not have or other things he requires. Without producing anything (tangible or intangible goods), there will be no chance of generating wealth. In the process of producing goods and services, a producer adds to his existing wealth. Also, the existence of those products (raw materials, semi-finished, and finished products) constitutes wealth (not necessarily monetary).
Special skills acquisition
People are able to acquire special skills in the course of carrying out these activities. They learn new technical know-how, special ways of carrying out production, etc., and highly skilled in different ways. This aids in acquiring new skills and apply them to their activities.
In the early days, that is before the development of specialization, every family or individual had to produce all that they required. They had to produce their own food, defend themselves, build their own houses, provide medical assistance for themselves, etc. The primary aim of the production was to satisfy the wants of their family, but presently, there is specialization. With the modernization in society, people engage in different occupations. The income people derive from their occupations, they are able to use it to purchase goods and services they do not produce. People become experts in their various fields and carry out their occupations accurately.
Satisfaction of human wants
The purpose of production is to satisfy human wants. In other words, the creation of utility comes about. It is absolutely a waste of time, effort, and resources to produce things that people do not need or require. This implies that whatever a firm is producing must move towards satisfying human wants.
The basic wants of people include food, clothing, and shelter. With the advancing society, human wants have increased beyond. People presently want luxuries beyond basic necessities of life.
Elements of production economics
The fundamental assumption of production for a firm is to make a profit and there are critical elements that influence production in economics.
Efficiency plays a major role in achieving and maintaining full capacity rather than being inefficient in producing goods. Inefficiency, in this case, means not producing at an optimal level or producing insufficiently. There is a close relationship between changes in efficiency and the positive shift in current inputs. These include technological advancements in relation to the producer’s position.
The calculation of efficiency is; maximum potential output divided by the actual input.
Technological change is a significant factor that determines the advancement of economic production results. This includes the industrial revolution. It is important to continue monitoring the effects of changes in technology on production and promote the development of new technologies or technological advancements.
It is assumed that economic markets set prices from external factors since the producer is the price taker. Pricing is therefore an important element that applies to production economics in the real life. When prices become too high, producing the product no longer becomes viable. Also, the price has a strong link with consumption (in the theory of consumer behavior) which influences the entire production.
Factors of production
Sometimes called means of production. The term is also known as productive resources or agents of production. It refers to those inputs or resources that producers must combine together in order to produce goods and services. These factors include land, labor, capital, and entrepreneur or enterprise.
We shall briefly look at these factors of production and their rewards.
To the layman, land may only mean the solid part of the earth on which man lives. The land is a free gift of nature that is fixed in supply. In Economics, land means all forms of natural resources with which nature endows a particular country. They are those resources that nature freely gives to man. These include soil, farmland, mineral deposits, sunshine, fishing grounds (water bodies like lakes, seas, and rivers), etc. The land is a passive factor, meaning that it is useless without any human effort. In accounting, the land is a fixed asset.
The reward that accrues to land is rent.
Characteristics of land as a factor of production
We shall discuss the characteristics of land compared to other factors of production.
A free gift of nature
The land is a free gift of nature which is said to have no cost of production. This is because no man did anything to bring the land to existence. Nature supplied it freely to man. It is, therefore, a free gift of nature that is outside man’s control in its situation.
Other factors of production are not free gifts of nature. Capital is man-made and labor involves human efforts. Though man is not artificial, most efforts that man put in are artificial to a very large extent.
Saying that land has no cost of production is of little significance to economics. Though man did nothing to bring it to existence, humans apply efforts and capital to increase its utility. That means land is of little value if a man makes no use of it. For example, when gold, silver, or tin ore remain underground, they cannot serve any economic purpose. Another thing is that we spend money to reclaim land from the sea and desert.
The land is geographically immobile to a large extent. It remains fixed in its location and no one can move it from one place to another. On the other hand, labor and capital can move from one geographical location to another. One can move most forms of capital from one place to another except for large, fixed machinery that is very heavy and fixed. Humans who supply labor have the ability to move from one place to another.
In the occupational sense, the land is mobile just like capital and labor. It is mobile in the sense that one can put it to alternative uses. With the exception of sophisticated tools and machinery, we can put many forms of capital to alternative uses. Labor has the capability to move from one occupation to another. It is however easier for unskilled labor than highly skilled labor. This is because highly skilled labor tends to be more specific thereby making it occupationally immobile.
Fixed in supply (quantity)
The land is fixed in supply. This means that the total natural resources in the land are fixed. Examples include the quantity of crude oil, gold, diamonds, and coals. Man cannot increase the quantity of these resources in the long run, taking the whole earth into consideration.
In the short run, the supply of land is not actually fixed, taking some parts of the earth and specific types of land into consideration. For example, we can increase the size of farmland by improving farming techniques. This is equivalent to increasing the supply of land. Farmers can cultivate more land through irrigation schemes, increasing the fertility of the land, and applying plant nutrients also.
The increase of land through these means cannot increase indefinitely. Factors like erosion and flooding can reduce land area.
Other factors do not have an unlimited supply. at any point in time, the total supply of labor and capital can be fixed. The supply of labor and capital are not fixed in the long run, we can increase their supply. We can increase the supply of labor through training and employing more workers.
Varies in quality and location
The land varies in quality and its value varies with its location. The quality here means the natural quality of the land. For example, fertile and infertile lands. Some minerals like coals have different grades depending on their quality. Also, some fishing grounds are richer than others.
another fact is that the location of the land is a determinant of its value. For example, lands in urban areas are more costly than lands in rural areas. This is a result of the fact that the demand for land in urban areas is higher than in rural areas.
Like land, labor has qualities that change with time. For example, tools and machines are more efficient than others. Labor can either be skilled, semi-skilled, or unskilled. The varying qualities of capital and labor are man-made to a very large extent.
Also, the value of capital and labor can depend on the places we find them. But they can easily move from one place to another where they command higher prices, unlike land which is fixed in location.
Subject to the law of diminishing returns
In industries that largely depend on the land, production is subject to the law of diminishing returns. Diminishing returns that occur on land take place basically as a result of its fixed state.
This law also applies to other factors of production when we hold any of them constant. At a point, it was said that agriculture was the only occupation subject to the law while manufacturing processes take place under the conditions of increasing returns. It is now clear that increasing returns, as well as diminishing returns, operate in every form of production. This means that we can apply it to any factor of production.
Importance of land in production
The land is a natural endowment we use in production. A major service that land provides is providing a site where production activities take place. For example, a site for locating an industry, mining, crop farming, fishing, etc. The land also provides raw materials which we use for the production of goods and services.
The following are the importance of land;
The agricultural sector utilizes the land for crop farming thereby providing food for the population. Crop farming also provides raw materials for further production, exports, and foreign exchange earnings for many countries.
Forestry and wildlife
Forests provide timber products for foreign exchange. Timber products are cash crops in agriculture and we also use them in local industries for manufacturing furniture and other wood products.
Grassland areas are important for the grazing of animals. Forest areas with wild animals promote tourism as well as creating habitation for the wild animals.
Mining and quarrying
The land is a source of mineral exploitation which constitutes most of the relevant exports in many economies of the nations. Mining also contributes to the employment of workers.
The land is important in providing sites and materials for manufacturing processes. It is relevant in building and construction. It provides sites for the location of industries and other commercial activities. Roads and railways for transportation, we build them on the land and this helps in facilitating movements from one geographical location to another.
The land provides building materials and construction materials as well. It also provides raw materials for the industry. Examples include sand, stone, wood, and water for building houses, bridges, dams, etc. We use limestone for the production of cement and it is a product of the land.
They are parts of land we use for transport purposes. Water bodies also provide areas for fishing, tourism, irrigation, and a source of generating hydroelectric power.
Labor refers to all human efforts, both physical and mental, skilled and unskilled, scientific or nonscientific used in carrying out productive activities. This is usually for a reward.
For example, the effort of a laborer in the field which is a physical effort, and the effort of an accountant which is a mental effort. We refer to these as labor.
Economists put their interests so much in the quantity as well as the quality of labor. The quantity of labor is the total supply of labor while the quality of labor determines efficiency.
Labor is categorized into three namely; skilled labor, semi-skilled labor, and unskilled labor.
Labor is important in providing manpower which is a vital requirement for producing goods and services. It is an active factor of production without which land and capital will be dormant. Industries require labor to operate machines and carry out production processes. Human effort is relevant in tilling the ground for crop farming and also for driving vehicles.
The reward for labor is wages and salaries.
Capital refers to man-made productive assets, meaning all man-made wealth we use in producing other goods and services. We also create further wealth from the capital. We can also refer to them as investment goods or producer goods. Capital is important not just for direct satisfaction but because it is important in assisting the production of consumer goods, services, and other capital goods.
Examples of capital include machines, tools, fuel, raw materials, factory buildings, stocks, money, semi-finished goods, etc. Capital is a passive factor and without the application of human effort, they are not useful in themselves.
The reward that accrues to capital is called interest.
Capital is important in different areas. It facilitates the mass production and distribution of goods and services. Without capital, it is almost impossible to do work and it increases the amount of work one can do per time. Capital helps to improve product quality by making the easier high standard of accuracy. Adequate capital helps in the smooth running of the business enterprise.
Capital comes in three major forms which include fixed capital, circulating capital, and social capital. Fixed capital has to do with long-term producer goods of the firm and it does not change in the process of production. Circulating (working) capital has to do with those capital goods that change their form or even used up in the process of production. Social capital has to do with those capital goods that are collectively owned (social infrastructure).
The entrepreneur is the person who coordinates and controls other factors of production (land, labor, and capital). He combines these factors in a way that he will obtain maximum production of goods and services at minimal costs. Also, he is the risk bearer and the decision-maker of the business.
The entrepreneur is a very important factor who has economic functions such as bearing the risks associated with the business. He provides the capital necessary for producing goods and services. Major decisions and policies as well are the functions of an entrepreneur, and he ensures the implementation of these decisions. Some of these decisions include what to produce, the method and scale of production, the form of business and its location, what to do with the profits, and how to distribute his products.
The entrepreneur can be a shareholder in a joint-stock company, a sole proprietor, a partner in a partnership business, etc.
The combination of the factors of production
The entrepreneur has to make vital decisions with regard to the rate at which he has to combine the factor inputs in order to obtain maximum output and profit. The factors that should determine his decisions include;
An entrepreneur tends to make more use of those inputs that are readily available than the inputs that are scarce.
An entrepreneur should consider the relative costs of inputs in his decision-making. entrepreneurs tend to make greater use of those inputs that are relatively cheap than the ones that are costly.
The type of enterprise
This has to do with whether the enterprise is labor-intensive or capital-intensive. This will greatly determine the level of capital and labor that the entrepreneur will employ in his production. Labor-intensive industries employ more labor while capital-intensive industries employ more capital. The type of enterprise places a limit on the extent to which one can substitute one factor of production for another.
The law of diminishing returns
An enterprise will stop adding further variable factors (labor and capital) to land at a point where marginal productivity begins to fall. On the other hand, when output increases with an increasing level of inputs, the enterprise will employ more inputs. The law of diminishing returns affects the combination of factor inputs.
Irrespective of the size of a company, manufacturing is a complex task. This activity involves people, materials, equipment, and other variables to convert raw materials into finished products. Though in some cases, production can be simple, involving just a few steps. It is important to know that the act of producing goods involves a lot of sub-processing steps or assembly steps that add up to the complexity.
The objective of every manufacturing firm is to maximize profit. This is possible when a firm is able to utilize manufacturing processes that will continuously pursue improvement processes and efficiency. The process requires solid management in order to realize profits.
Production management is a vital part of overall business management. It is the process of transforming raw materials into finished products. The term also implies the management of physical materials, adhering to design specifications, utilization of equipment, performance, and labor put into practice the company’s product strategy. This activity requires the coordination and supervision of inputs (people/labor, materials, and equipment).
There are four key areas in which managers make decisions;
This is the stage of producing the master schedule which requires managers to determine where production will begin. For example, what machine or facility. It also requires making decisions on when production will commence. Different products move at different speeds and this requires numerous inputs to be complete. The decision of when to produce bases on the overall product mix.
This is the floor-level application of the specifications of the design. here, managers direct equipment and staff to carry out the steps in completing their parts of finished goods. It also has to do with active management against quality standards and also close monitoring of production speeds against a confirmed measured run time.
Every production manager has the responsibility of monitoring and driving continuous improvement in manufacturing. Many companies tend to use different methodologies (such as six sigma or lean) to shape their efforts. Even without these methodologies, no process is static, and production management requires relying on the refining and the approval of floor-level process activities of labor and equipment.
Managers also need to manage their equipment to keep it in a smooth and effective running condition. They usually roll maintenance costs into finished goods especially for manufacturers that use a cost-plus system to determine costs and set prices. Overall equipment effectiveness (OEE) is important because of this.
The term refers to the functional relationship between the factors of production (factor inputs) and the number of goods produced (output).
Prof. Koutsoyiannis defined it as “a purely technical relation which connects factor inputs and factor outputs”. Also, Prof. Watson stated that it is “the relation between a firm’s physical production (output) and the material factors of production (inputs)”.
We can say that the production function is a reflection of how much output we can expect if we have so much labor and so much capital as well as labor, and other factors. In other words, the production function indicates the physical relationship between the inputs and output of a manufacturing firm. The reason behind the physical relationships is that money prices do not appear in them. One thing that therefore becomes so important to quote is that as the demand function a production function is for a definite time period.
The function shows the flow of inputs which results in a flow of output during some time. It depends on the state of technology. The production function of the firm undergoes a change with every technological development.
There are times that a new production function can bring about more output and with fewer inputs or more inputs producing the same output. Sometimes, more output with the same level of inputs.
The mathematical relationship between inputs and outputs is as follows;
Q = f ( L, C, N ) Where,
Q = quantity of output
L = Labor
C = Capital
N = Land.
This implies that the level of output depends on the number of inputs that are available to a firm.
In simple cases where only two inputs exist such as labor and capital, and one output, the production function becomes;
Q =f (L, C)
Types of production functions
The production function is a central part of production theory. There are four major important production functions.
a) Linear Homogeneous Production Function
In a situation whereby a firm increases in the same proportion, we say that the production homogeneous. In this case, the degree of production is equal to one. It is known as the linear homogeneous production function. To estimate the function, it is important to express the function in an explicit functional form. We can express it mathematically as;
nQ = f (nL, nK)
The function also implies constant returns to scale. This means that if we increase L and K by n-fold, the output of the Q will also increase by n-fold. We can say that this form of production function is a well-behaved function. This simplifies the task of the entrepreneurs as well as making it convenient. The entrepreneur requires only finding out just one optimum factor proportion.
As long as the relative factor prices remain unchanged, the entrepreneur does not have to make any fresh decision with regard to the factor proportion he should use in the course of expanding his level of production. This function is also useful in the input-output analysis of a firm.
b) Cobb-Douglas Production Function
Charles W. Cobb and Paul H. Douglas studied the relationship between inputs and outputs. They formed an empirical production function, known as the Cobb-Douglas production function. Initially, the function does not apply to the production processes of a single firm. It applies to the entire manufacturing of products.
We can express the Cobb-Douglas production function as;
Q = ALαKβ Where,
Q = Output
L and A = Inputs of labor and capital
α and β = Positive parameters where α > 0, β > 0.
The equation explains that output is directly dependent on L and K. The part of the output L and К cannot explain, A will explain which is usually the residual, often called technical change.
Features of the Cobb-Douglas Function
- Constant returns to scale.
- Substitution elasticity is equal to one.
- A and p denote the labor and capital-output shares.
- A and p are also output elasticities with regard to labor and capital.
- If one of the inputs is equal to zero, the output will also be zero.
- The expansion path which the function generates is in a linear form and it passes through the origin.
- The marginal product of labor equals the increase in output when we increase the labor input by one unit.
- The average product of labor equals the ratio that is between output and labor input.
- The ratio α /β measures the intensity of factors. When this ratio is higher, the technique will be more labor-intensive and when the ratio is lower, the technique of production will be more capital intensive.
Importance of the Cobb-Douglas Function
- The function matches the nature of all industries.
- It is convenient in making both international and inter-industry comparisons.
- Very common in the field of econometrics.
- We can make it fit in time series and cross-section analyses.
- It is easy to generalize the function in the case of ‘n’ factors of production.
- We can easily compute the unknown parameters a and p in the function.
- It becomes a linear function in the logarithm.
- It is very popular in empirical research.
Limitations of Cobb-Douglas Function
- The function includes only two factors and ignores other inputs.
- It assumes constant returns to scale.
- The problem of measurement of capital exists because it takes only the quantity of capital that is available for production.
- It assumes perfect competition in the factor market and this is unrealistic.
- It may not fit all industries.
- The function bases on the substitutability of inputs but neglects the complementarity of factors.
- The parameters are not able to give proper and correct economic implications.
c) Constant Elasticity of Substitution Production Function
The function is also known as the Homohighplagic production function. This function comprises three major variables Q, К, and L, and three parameters A, a, and 0. It may be expressed in the form. The mathematical expression of this function is;
Q = A [α C-ϴ+ (1- α) L -ϴ]-1/ϴ where,
Q = Total output
К = Capital
L = Labour
A = The efficiency parameter that indicates the technology state and organizational aspects of production.
The function shows that with organizational and technological changes, the efficiency parameter causes a shift in the function.
Features of Constant Elasticity of Substitution Production Function
- The value of the elasticity of substitution is dependent on the value of the substitution parameter.
- The marginal products of capital and labor are usually positive if we assume that the returns to scale are constant.
- The marginal product of an input increases when other factor inputs increase.
- When the elasticity substitution is less than unity the function does reach a finite maximum as one factor increases while the other is held constant.
- The marginal product curves have a downward slope.
- Estimating the elasticity of substitution parameter requires the assumption of perfect competition.
Merits of Constant Elasticity of Substitution Production Function
- The function is more general.
- It covers all types of returns.
- It takes into account the number of parameters.
- The function takes into account the raw materials among its inputs.
- It is very easy to estimate.
- It does not make unrealistic assumptions.
Limitations of Constant Elasticity of Substitution Production Function
- The generated function suffers from the setback that the elasticity of substitution between any parts of inputs is the same and this does not appear to be realistic.
- While estimating parameters of this function, we may encounter large problems like the choice of exogenous variables, estimation procedure, and the problem of multicollinearities.
- Making an attempt to rule out the problem of multicollinearities will intensify the errors in measuring the variables.
- There are serious doubts raised pertaining to the possibility of identifying the production function under a change in technology.
Variable Elasticity Substitution Production Function
Of recent, Bruno, Knox Lovell, and Revankar have made attempts to develop a new production function. This resulted in generalizing the Constant Elasticity of Substitution Production Function which as well possesses the desirable properties of variable elasticity substitution.
Lu and Fletcher filled a logarithmic relationship that contains the wage rate (W) and also the capital-labor ratio (K/L) in order to explain the value-added per unit of labor.
V/L = a + b log W + с log K/L where,
V = Value added
W = Wage rate
K = Capital
L = Labour
a, b and с are the parameters that should be estimated.
Therefore, the elasticity of substitution (σ) is
σ = b/1-c (1+WL/rk) where,
WL and rk = The shares of labor and capital.
Features of the Variable Elasticity Substitution Production Function
- This function is able to satisfy the requirements of a neoclassical production function.
- It also includes the fixed co-efficient models.
- The production function is more general.
Characteristics of the production function
The factor inputs are substitutes for one another. This makes it possible to change the total output by changing the number of inputs (one or a few), holding the number of other inputs constant. The ability to substitute factor inputs is what gives rise to the law of variable proportions.
Factor inputs are complementary to one another. This means that producers use two or more inputs together to produce output. It implies that nothing will be produced if the quantity of either of the inputs used in the production process is equal to zero.
The principle of returns to scale is another factor that manifests the complementary nature of inputs. It reveals that one should increase the quantity of all inputs simultaneously in order to produce a higher level of total output.
This shows that inputs are specific to the production of a particular good. Machines and equipment, specialists, and raw materials are examples of specific factors of production. Inputs may not be completely specific as it is possible to use them for producing other commodities.
In carrying out manufacturing processes, we cannot ignore any of the inputs. In some instances, the slightest ignorance is not possible when the inputs are perfectly specific.
Production basically involves time, that is, the time period under consideration determines the combination of inputs to a large extent. The longer the time period, the more the producer has the freedom to change the number of different inputs he uses in production processes.
In the production function, it is possible to change the number of all inputs only in the long run. Changing the total output by changing the quantity of single input may be possible in the short run.
Factors that determine the level of production
Some factors affect production positively or negatively. When these factors that determine the level of production are positive, they tend to favor production and therefore there will be more productivity; but if they affect it negatively, then there will be a reduction in production.
The quantity and quality of inputs
The quantity and quality of productive resources (land, labor, capital, and entrepreneur) in a country determines the level of output produced. Keeping other things equal, the higher the quality and quantity of inputs, the higher the level of output. When there is high efficiency and abundant resources, the total output will be high. On the other hand, if the inputs are scarce and inefficient, it will result in low productivity.
The level of production will be higher in a country that has a stable government than in a country that is vulnerable to civil unrest and political instability. If the political and social organization is stable, the attention will base on improving the citizens’ welfare by improving productivity. In cases where there is civil unrest, people and governments will focus their attention on maintaining order. Investors as well will be discouraged to invest because they are scared of future uncertainties.
Natural factors such as weather (and its effects) can affect the level of production to a large extent. This greatly affects countries that are agricultural. When the weather condition is favorable, the level of output will also increase. Certainly, the volume of output will be low in adverse weather conditions. For example, if there is drought, floods, earthquakes, or storms, the level of output will be low.
The provision of infrastructural facilities and the type of general working conditions that employers provide affect the level of output. When there is a good working environment and social amenities, it helps to improve the efficiency of labor. Such environments include canteens, recreational centers, health services, and a well-ventilated working environment.
Where employers do not provide a conducive working environment for their employees, the efficiency of labor will be low thereby lowering the level of output.
The type of economic policies
The type of economic policies governments undertake may disturb the utilization of available resources. These policies have a very large share in affecting the level of production.
For example, the government can divert a large proportion of resources to agriculture. This will however increase agricultural products keeping every other thing equal.
On the other hand, the areas in which the government does not place priority will suffer a decline in productivity. This is because the government will not allocate many resources to those areas.
The state of technical knowledge
The rate at which the available manpower and technical skills are developed affects the level of output. Countries with a high level of technology generally have a high level of productivity. In countries with a low level of technology, there is a low level of productivity. This implies that a low level of technology is a major cause of low productivity and poor development in manpower.
Efficient use of factors of production
The level at which firms put available inputs into efficient use will determine the level of output. If they put productive resources to their best uses, the level of output will be high. On the other hand, productivity will be low if there is an inefficient allocation of inputs.
We have seen that production is the combination of raw materials or inputs to create finished products as well as the creation of utility. All these activities should be able to satisfy human wants.
The synonyms for production include manufacturing, making, creation, management, construction, and rendering. These words move towards the direction of producing goods or services to satisfy human wants.
The term does not only imply the creation of tangible goods but also intangible goods/services, that is why economists describe it as the creation of utility. Intangible goods include medical services, transportation, legal services, etc.
The health of an economy is highly dependent on how productive that economy is, and we can see that production is important to any economy. This importance includes improvement in the standard of living of an economy, provision of employment opportunities, availability of goods and services, increase in export potentials, increase in wealth, etc. All these moves towards the healthy growth and development of an economy.