Production (economics)
Production is the process of combining various inputs, both material (such as metal, wood, glass, or plastics) and immaterial (such as plans, or knowledge) in order to create output.
[3] Known as primary producer goods or services, land, labour, and capital are deemed the three fundamental factors of production.
Under classical economics, materials and energy are categorised as secondary factors as they are byproducts of land, labour and capital.
Thus market production has a double role: creating well-being and producing goods and services and income creation.
Within production, efficiency plays a tremendous role in achieving and maintaining full capacity, rather than producing an inefficient (not optimal) level.
Furthermore, economies of scale identify the point at which production efficiency (returns) can be increased, decrease or remain constant.
Therefore, it is critical to continue to monitor its effects on production and promote the development of new technologies.
Economic well-being originates in efficient production and it is distributed through the interaction between the company's stakeholders.
Due to competition, the price-quality-ratios of commodities tend to improve and this brings the benefits of better productivity to customers.
The changes in prices or qualities of supplied commodities have an effect on both actors' (company and suppliers) production functions.
Due to competition and development in the market, the price-quality relations of commodities tend to improve over time.
The producer community (labour force, society, and owners) earns income as compensation for the inputs they have delivered to the production.
This type of well-being generation – as mentioned earlier - can be reliably calculated from the production data.
A producing company can be divided into sub-processes in different ways; yet, the following five are identified as main processes, each with a logic, objectives, theory and key figures of its own.
The portion of growth caused by an increase in productivity is shown on line 2 with a steeper slope.
They show that the great preponderance of economic growth in the US since 1947 involves the replication of existing technologies through investment in equipment, structures, and software and expansion of the labor force.
The production function relates the quantity of factor inputs used by a business to the amount of output that result.
It is the change in output from increasing the number of workers used by one person, or by adding one more machine to the production process in the short run.
The law of diminishing marginal returns points out that as more units of a variable input are added to fixed amounts of land and capital, the change in total output would rise firstly and then fall.
In order to improve efficiency and promote the structural transformation of economic growth, it is most important to establish the industrial development model related to it.
At the same time, a shift should be made to models that contain typical characteristics of the industry, such as specific technological changes and significant differences in the likelihood of substitution before and after investment.
Also see an extensive discussion of various production models and their estimations in Sickles and Zelenyuk (2019, Chapter 1-2).
Even as reduced, it comprises all phenomena of a real measuring situation and most importantly the change in the output-input mix between two periods.
Hence, the basic example works as an illustrative “scale model” of production without any features of a real measuring situation being lost.
In practice, there may be hundreds of products and inputs but the logic of measuring does not differ from that presented in the basic example.
If the object is not homogenous, then the measurement result may include changes in both quantity and quality but their respective shares will remain unclear.
The process of calculating is best understood by applying the term ceteris paribus, i.e. "all other things being the same," stating that at a time only the impact of one changing factor be introduced to the phenomenon being examined.
The income change created in a real process (i.e. by production function) is always distributed to the stakeholders as economic values within the review period.
The procedure for formulating different objective functions, in terms of the production model, is introduced next.
In the income formation from production the following objective functions can be identified: These cases are illustrated using the numbers from the basic example.
