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Production – Meaning & Basic Concepts

In Business Economics, production does not only mean making goods in a factory. It includes all activities that create utility (usefulness).

1. Meaning of Production

Production is the process of creating utility by transforming inputs into outputs to satisfy human wants.

Key points:

  • It may create form utility (changing shape – wood → furniture).
  • It may create place utility (transport – goods from factory to market).
  • It may create time utility (storage – warehousing).
Key Concept – Production
Production in economics means creation or addition of utility, not just physical making of goods.

2. Inputs (Factors of Production)

Inputs used in production are called factors of production:

  1. Land – all natural resources (soil, water, minerals).
  2. Labour – human effort (physical and mental).
  3. Capital – man-made resources (machines, tools, buildings, money used in business).
  4. Entrepreneur – organiser who brings other factors together and takes risk.

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3. Output

Output is the quantity of goods or services produced during a given period.

Example:

  • 1,000 units of soap produced per day.
  • 200 haircuts provided per week in a salon.

4. Production Function (Intro)

Production function shows the technical relationship between inputs and output, in a given state of technology.

Symbolically:

Q = f(L, K, …)

Where:

  • Q = Quantity of output
  • L = Labour
  • K = Capital

Other factors (land, organisation, technology) may also be included.

Exam Tip
In short notes, write: "Production function is the functional relationship between physical inputs and physical output under a given state of technology."

5. Short Run vs Long Run (Concept)

  • Short run – at least one factor is fixed (e.g., plant size). Only variable factors like labour can change.
  • Long run – all factors are variable; firm can change plant size, machinery, etc.

This distinction is important for:

  • Law of Variable Proportions (short run)
  • Returns to Scale (long run)

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6. Quick Revision Points

  • Production = creation/addition of utility.
  • Inputs (factors): land, labour, capital, entrepreneur.
  • Output = quantity produced in a given time.
  • Production function shows relation between inputs and output.
  • Short run vs long run are time concepts in production.

7. Quiz Time 🎯

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