The theory of Production is concerned with the problem of combining various inputs to produce certain level of output. It analyses the physical relationships between inputs and outputs. It provides a base for analyzing the relation between costs and output and therefore helps the firm to determine its profit maximizing output. It also provides a bade to analyze the demand for the factors of Production and , therefore, helps to determine the prices of the factors. Thus the theory of Production plays an important role in the theory of value.
Concept of Production : The essence of Production is the creation of utilities. All labor that produce utilities are considered as productive. Therefore a productive activity may involve any of the following forms, namely ; 1) Increase in the quantity of goods
2) Change in the form of a goods or 3) Change in the temporal form of goods. In all the above cases production is said to have taken place if the people prefer the new quantity or the new form or the new distribution to the old.
The act of production involves the transformation of inputs or resources into outputs of goods and services. For example , HCL hires labor to use machinery, parts and raw materials in factories to produce Computers. The output of a firm can be a final product like a Personal Computer or an intermediate product, such as semi conductors which are used in the production of computers and other goods. The term Production in terms of Operations is not confined to just bringing about physical transformation but also covers rendering of services.. The services are education, medicine, banking , communication, transportation and many others.
Inputs are the resources used in the production of goods and services. The inputs may be classified into labor, capital, land, or natural resources and entrepreneur. The inputs can also be classified as fixed and variable inputs. Fixed inputs are those which cannot be changed in the short period of time. They are the organization’s plant and equipment. On the other hand , variable inputs are those that can be varied easily in the short period. They are raw materials and less skilled labor.
Production function: The theory of production revolves around the concept of the production function. A production function can be an equation, table or graph showing the maximum amount of a commodity that a manufacturing set up can produce from a given set of inputs during a period of time.
The concept of production function describes the ways in which the factors of production combined by a firm to produce different levels of output . More specifically, it shows the max volume pf physical output available from a given set of inputs, or the min set of inputs necessary to produce any given level of output.
The Production function comprises an engineering or technical relation, because the relation between inputs and outputs is a technical one. The production function is determined by a given state of technology. When the technology improves, the production function changes, because the new production function can yield greater output from the given inputs. Smaller inputs may be enough to produce a given level of output. Further, the production function incorporates the idea of efficiency . Thus , Production function is not nay relation between inputs and outputs, but a relation in which a given set of inputs produces a maximum output. Therefore the production function includes all the technically efficient methods of producing an output.