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Production: Law of Diminishing Marginal Product of Labour and Production Process

Law of Diminishing Marginal Product of Labour

In general way, we can say that with continuous increase in the variable factor labour, its marginal product will increase initially till certain point is reached, but after that it will decrease and may become negative, keeping all other factors unchanged. This is popularly known as the Law of diminishing Marginal Product of labour Suppose, a factory that produces widgets. The factory uses the same amount of electricity to produce zero to 100 widgets, but the machinery functions less efficiently if it is overworked. The electricity consumed by the factory՚s machines increases exponentially when production reaches 101 widgets or more. Marginal productivity rises as output approaches 100 widgets because higher volumes can be produced and sold without incurring extra production expenses. However, after the 100-unit production mark is breached, production costs start to rise more quickly than output volume. Eventually, the exponentially rising electricity costs will subsume the profit generated by each widget. To remain profitable the company should look other ways.

Production Process

Production process involves procuring or arranging the factors of production from the owners of the factors, forming the right combination of factors, purchasing and creating an inventory of raw materials for its use in the production, producing, storing and finally selling the output.

Role and Importance of Firms and Industries

  • A firm is an individual production unit which produces goods and services for sale in the market. There are certain production units like charitable schools, charitable hospitals and government units etc. provide services not to earn profit. They work for social welfare. Normally a firm is concerned with the production of a single commodity.
  • Industry is a group of all the firms making production of a commodity (one type of good) .
  • For example, Bata Shoe Company is a firm which makes shoes, but the shoe industry includes all the firms producing shoes. So, Bata, Action, Liberty, Adidas, Nike and Reebok etc. form the shoe industry.

The importance of the firms and industries can be explained in brief as given:

Illustration: Role and Importance of Firms and Industries
  • Goods and services for consumption: These days human wants are growing at a faster rate. In order to satisfy these wants various types of goods and services are required for our daily consumption. All these goods and services are provided by firms and industries.
  • Goods for investment: We require various types of goods for investment. We require machines, plants, transport vehicles likes buses, trucks, railways and aero planes, ships etc. and various other things for investment. All these things are produced by firms and industries.
  • Employment to many persons: Firms and industries are the source of employment to the people. Most of the people get employment in firms and industries by which they get income for the satisfaction of their wants. We cannot live without employment. So, the importance of firms and industries can easily be understood.
  • Infrastructure for the development of the country: They provide us energy, transport, communication, health, education and housing which is the basic requirement to provide infrastructure for the country. Without the development of infrastructure, the all-round development of the country is not possible. So, we cannot deny the role and importance of firms and industries.

Identifying Various Types of Producers in the Economy

On the basis of ownership, the production units can be broadly classified into the following:

Indigenous Production Units

The production units located in a country and owned by the residents of the country are called indigenous production units. Around us most of the production units are indigenous. Farmhouses in the villages, shops, small factories, big factories, hospital school, college, cinema hall, restaurant, dairy farm, government offices, self-employed doctors, lawyers and teachers etc. are all examples of indigenous production units. Indigenous production units can be classified into:

Private Production Units

Private sector units can further be classified on the basis of number of owners of such unit. Most of the small units like labour, washer man, cobbler, tailor, milk vender etc. are owned by a single person. But some of the production units may be owned by more than one person. The number of persons may be two, twenty, hundred, thousand or a lakh or even more. On the basis of number of owners, private sector production units can be classified into the following categories.

  • Sole proprietorship: Such production units are owned by a single person. He is responsible for the profit and loss of the production units. He is responsible for the management and working of the production unit.
  • Partnership: Such production units are owned by two or more persons. Maximum number is 20. Owners of such production units are called partners of the company. All the partners are collectively responsible for the management and working of the production unit.
  • Company or Corporations: It is a production unit owned by a large number of persons. The sum invested in the company is divided into shares. The buyers of these shares are called shareholders. They are all the owners of the company. In private company the minimum number of shareholders is two and the maximum number is 50. But in public company minimum number is seven but there is no maximum limit. These shareholders select some persons for the management of the company who are called directors of the company. These companies are established under companies act 1956. The profit of the company is distributed.
  • Cooperative society: It is also a production unit managed by a number of persons. It is a voluntary association of persons for mutual benefit. Its aims are achieved through self-help and collective efforts. In some respects, it is similar to the company. Its owners are also called shareholders. It works according to cooperative societies Act 1912. The minimum number of shareholders is ten but there is no upper limit. The shareholders select some persons among themselves for the managements of the society. The profits of the society are divided among the shareholders according to the shares held by them. Cooperative stores which sell various goods to consumers at reasonable rates, cooperative housing societies which provide flats and houses to its members are the example of cooperative societies. Kendriya Bhandar which provides various items to consumers is a very big cooperative society.
  • Private Non-profit Organizations: There are private production units which are run by institutions, such as trusts, societies etc. like charitable hospital, charitable school, welfare societies etc. Such production units provide services mainly with the aim of serving the member of society as a whole without any aim to earn profit.