THE THEORY OF PRODUCTION

Production: Production is the process of combining various inputs, both material and immaterial in order to
create output.
• Agricultural production is a series of activities that result in a product that will ultimately be sold at retail.
• Production uses resources to create a good or service.

Four Factors of Production

➔ To produce there is a need for resources and these resources are called factors of production. Factors of production refer to
the goods and services needed for the production of other goods and services. For example, if a farmer wants to produce
wheat, he needs land, labour, machinery, seeds, manure, etc. All these things are called factors of production.
➔ No production is possible without factors of production.

➔ Thus, the factors of production are the resources used in the process of production.

➔ They are also referred to as raw materials or means of production.

➔ Traditionally they are classified as land, labour, capital, and organization (or enterprise).

They are categorized into four Categories-Land, Labour, Capital, and Entrepreneurship.
𝐋𝐀𝐍𝐃: In economics, land includes not only the surface of 𝐋𝐀𝐁𝐎U𝐑: In economics, labour refers to any human effort
the earth but also all other free gifts of nature such as forests, - physical or mental.
minerals, water, etc. So, the services provided by doctors, engineers, lawyers,
teachers, etc. all are included in the meaning of labour.
Characteristics or Peculiarities of Land
1. Land is fixed in supply and Land is a free gift of nature Characteristics of Labour
3. Land is permanent and indestructible 1. Labour cannot be separated from the labourer
4. Land differs in terms of fertility and situation 2. Labour is perishable
5. Land has no geographical mobility 3. Labour is an active factor of production
6. Land is a passive factor of production 4. Labour is a mobile factor
7. Land is subject to diminishing returns 5. A labourer sells his labour, not himself

𝐂𝐀𝐏𝐈𝐓𝐀𝐋: In economics, capital is defined as productive

Q. Explain importance of land as a factor of production
Q. Explain characteristics of land as a factor of production

𝐎𝐑𝐆𝐀𝐍𝐈𝐙𝐀𝐓𝐈𝐎𝐍/𝐄𝐍𝐓𝐑𝐄𝐏𝐑𝐄𝐍𝐄𝐔𝐑𝐒𝐇𝐈𝐏
wealth.
According to Marshall, “capital consists of all that wealth
➔ The organization is the factor of production which controls other than free gifts of nature, which yield income”.
other factors of production. An organization is a factor of
production that controls and regulates business, makes Characteristics of Capital
decisions, and bears the risk of loss. 1. A man-made factor
2. A passive factor
Features of Organization 3. A mobile factor
1. Takes the initiative 2. Self-motivated 4. A temporary factor
3. Decision-maker 4. Resource mobilizer 5. Capital depends upon technology
5. Risk bearer 6. Innovator
The Production Function: The functional relationship between inputs and outputs is called the production function.
The production function represents a purely technical relationship in quantities between input and output.

Production function of a commodity can be studied in two different ways:

1. Holding the quantities of some factors fixed while varying the others.
2. Varying all the factors.

Total Physical Product (TPP): Total physical product is the amount of total output produced by a variable factor, keeping the
quantities of the other factors fixed.
Output or yield is often called TPP.
Average Physical Product (APP)=Y/X: Average physical product of a variable factor is the total physical output divided by the
amount of the variable factor used, keeping the quantities of the other factors constant.
Marginal Physical Product (MPP)=ΔY/ΔX: Marginal physical production of a variable factor is the addition to the total
production by the employment of an extra unit of that factor.

The Law of Variable Proportions: states that as the quantity of one factor is increased, keeping the other factors fixed, the
marginal product of that factor will eventually decline.
The law can be stated in different ways:

➔ “If increasing amounts of one input are added to a production process while all other inputs are held constant, the amount of
output added per unit of the variable input will eventually decrease.”

➔ “The law of variable proportions is also popularly known as the law of diminishing returns or the law of diminishing marginal
returns.
 Units of TPP MPP APP
Labour (Kg) (Kg) (Kg)
(No.) Stage

L Q

Table: Schedule of 1 5 - 5
Diminishing Returns/ Three 2 12 7 6 I stage
stages of production 3 21 9 7

4 28 7 7
5 30 2 6 II stage
6 30 0 5
7 28 -2 4 III stage
8 24 -4 3

Three Stages of Production

The behaviour of output when the varying quantity of one factor is combined with a fixed quantity of the other can
be divided into three distinct stages:
 Three Stages of Production Stage I: Stage of Increasing Returns
● MPP is more than APP and APP increases throughout this zone.
● MPP increasing up to the point of inflection (at that time TPP increases at an
increasing rate) and then declines. After the point of inflection, the TPP increases at
a decreasing rate.
● This zone ends at the point where MPP=APP or where APP is Maximum.
● This is an irrational zone of production.
● The technical efficiency of fixed resources is also increasing as reflected by the
increasing Total Physical Product.
● The technical efficiency of variable resources is increasing throughout this zone as
indicated by Average Physical Product.
● In this zone fixed resources are in abundant quantities relative to variable
Third Stage or III Region or Zone III: resources.
● This zone starts from where the technical efficiency Second Stage or Region II or Zone II:
of fixed resource is maximum (TPP is Max). • Where the technical efficiency of variable resource is maximum. APP is Maximum
● APP is declining but remains positive. MPP becomes (MPP=APP).
negative. And because of that TPP declines at faster • MPP is less than APP. APP and MPP decreases throughout this zone.
rate.
• As the MPP declines, the TPP increases but at a decreasing rate. In this zone variable
● Variable resources are in excess capacity. The resources are more relative to fixed factors.
technical efficiency of variable resources is
decreasing as reflected by declining APP. The • The technical efficiency of variable resources is declining as indicated by declining
technical efficiency of fixed resource is also APP. The technical efficiency of fixed resources is increasing as reflected by
decreasing as indicated by declining TPP increasing TPP.
● This zone is irrational so producers should never • This is a rational zone of production in which the producer should operate to attain
operate in this zone even if the resources are his objective of profit maximisation.
available at free of cost. • This zone ends at the point where TPP is maximum or MPP=0