Production and production function

Production in economics refers to the process by which man utilizes or converts the resources of nature, working upon them, so as to satisfy human wants. In other words, production is an economic activity that transforms inputs or resources into output of goods and services, thus creating or adding utility. Utility is the want satisfying power of a good or service. Processes of production create utility by conferring form utility, place utility and time utility. Manufacture of copper wires is utility of form as copper ore is transformed into wires. Export of mangoes to Middle East is utility of place as it provides satisfaction to greater number of people. Canning of seasonal fruits and storing of seasonal vegetables in col9- storage creates time utility as they are made available during off-season. Managers are interested in productivity that is simply a ratio of output to input.

A production function is a purely technical or physical relation between inputs and maximum output that can be produced, within a given period of time, with a. given level of technology. It can be presented in form of an equation, table and graph. Output (Q) is a function of combination of inputs namely land (Ld), labour (L), capital (K), managerial ability or management (M) and technology (T). The relationship is generally expressed in the form of an equation as follows:

Q = f ( Ld, L, K, M, T )

A two input production function can also depict Significant results and can be easily generalised for any number of inputs. Therefore, a production function takes the following form:

Q = f (L, K)

Labour and capital are taken as two inputs since they are regarded as inevitable inputs to produce any quantity of a good. They are taken as substitutes in production. A production function is based on following assumptions:

(i)      Perfect divisibility of both inputs and output,

(ii)     Limited substitution of one factor for the other,

(iii)    Technology is constant, and

(iv)    Inelastic supply of fixed factors in the short run.

It should be noted that the relationship between inputs and outputs exists for a specific time period. In other words, quantity is not a measure of output accumulated overtime. It is believed that at any moment of time, the firm is producing the maximum output with the best available production technology. Further profit maximisation by managers assumes that production is technically efficient, that is, neither inputs nor outputs are wasted or misused. Technology is also taken as constant since technological innovations result in a change in the relationship between inputs and output.

Technological change or advance of technology may involve introduction of new methods of producing existing products, improvements or cost reduction of existing products (due to process innovation), or new techniques of organisation, marketing and management. It may also result in availability of new products due to product innovation. A manager should be aware that technique of production refers to production process employed by a firm whether labour intensive or capital intensive. 

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