Economics: Production: Concept of Production of Commodity and Production Process

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Concepts of Production of Commodity

There are mainly three concepts relating to production of a commodity

Total Product (TP)

TP refers to the total quantity of output of a commodity at a particular level of employment of an input, say labour, when the employment of all other inputs is unchanged. TP can be increased or decreased by increasing or decreasing the units of labour. So, amount of TP directly depends upon amount of labour employed. Because it can be changed, labour is called variable factor.

Concepts of Production of Commodity

Concepts of Production of Commodity

Average Product (AP)

  • AP is the output per unit of a variable input, say labour. It can be obtained by dividing TP by the number of units of a variable factor.

  • where L is the number of units of labour input.

Marginal Product (MP)

MP may be defined as increase or decrease in TP resulted due to addition of one extra unit of labour, keeping all other inputs unchanged. So, we can write,

Law of Diminishing Marginal Product of Labour

  • 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.

  • To understand the law properly think that there are two factors of production, Labour and Capital, where capital is in the form of a machine. Say that labour is the variable factor which can be increased to increase output and capital is the fixed factor which is kept constant. In the beginning only 1 labourer is working. May be one labourer is not sufficient to use the machine efficiently. So, the unit of labour is increased to 2 and then to 3. Initially when we increase labour, it becomes fruitful because the labourers can handle different works as per their efficiency and choice. So, output of the extra unit of labour increases. But there is a limit to which labour can be increased because then we may require another machine. But machine is a fixed factor and cannot be increased or decreased. So as a result of increasing the variable factor labour only, machine gets overused. Also, the work of a machine cannot be done by the labourers that were added. So, the output of each of the extra unit of labour i.e. MP of labour beyond a point starts decreasing.

  • Hence, we learn that increase in the variable factor should take place till the point where its marginal product becomes minimum and stop employing further before the marginal product becomes negative.

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.

  • The person who lead in organizing the production activity is called Entrepreneur. He has to make efforts to bring labour by paying wage. Similarly, land and building, machinery etc. have to be purchased or procured either by taking loan or by paying rent and interest, respectively. Entrepreneur himself can keep some margin in the form of profit for all his efforts.

Role and Importance of Firms and Industries

  • A firm is an individual production unit which produces goods and services for sale in the market. They provide services not to earn profit but 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. There are various types of industries supplying us different types of goods and services.

The Importance of the Firms and Industries Can be Explained in Brief as Given

  • Goods and services for consumption

  • Goods for investment

  • Employment to many persons

  • Infrastructure for the development of the country.

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