Simply put, production involves the transformation of inputs – such as capital equipment, labour, and land – into output of goods or services. (1) Whether or not to actually produce or to shut down Managers are required to make four different but interrelated production decisions: Furthermore, production decisions are an important part of managerial decision making. It forms the foundation for the theory of supply, which, is one of the basic concepts in the determination of prices. The theory of production lies at the heart of managerial economics. But in managerial economics, however, it is assumed that there are usually various alternatives open to the manager from which one has to be selected. From this we drive the proposition that the short run costs are partly fixed and partly variable in the long run all costs are variable.įinally, in traditional economics it is assumed that the techniques of production are ‘given’. In the long run, it is assumed that all factors are variable. In the short run, it is assumed that some factors (such as capital or plant size) remain fixed and others are variable. The distinction is not based on any time period but is made on the basis of the possibility of factor substitution. We usually draw a distinction between the short run and the long-run. Time also plays a very important role in the theory of production. The production system can be shown as a continuous, smooth flow of resources through the process ending in an outflow of a homogeneous product or two or more products (in fixed or variable proportions). In fact, the former is derived from the latter. Thus the theory of cost and theory of production are interrelated. Inputs take the form of labour of all types, the required raw materials and sources of energy. In reality, the outputs are the starting point of the operation inasmuch as they must be considered in the light of the market possibilities. The production system can be seen as consisting of three elements – inputs, the production process and outputs. Here we concerned with production in the narrow sense of physical transformation, with particular reference to economic problems connected with production in the factory. This definition surely includes other and equally vital forms of transformation such as that of location, whereby the finished car is moved from the factory to the showroom of the dealer from whom it can be purchased. In managerial economics, however, the term is used in a narrow sense to refer to the processes of physical transformation of resources, such as the transformation of iron ore into steel or the production and assembly of components into a finished car. It refers to the provision of goods and services for sale in the market with a view to satisfying human needs and wants. In traditional economics, the term ‘production’ is used in a broad sense. It is to be noted at the outset that the process may produce as joint products both goods and services (which are desired by consumers) and commodities such as pollution (which is not desired by consumers). 13.1 is a simple schematic presentation of the production process, which can be conceived of as transforming inputs into outputs. Inputs are the beginning of the production process and output is the end of the process. Production is a process in which economic resources or inputs (composed of natural resources like land, labour and capital equipment) are combined by entrepreneurs to create economic goods and services (also referred to as outputs or products). The business firm is basically a producing unit it is a technical unit in which inputs are converted into output for sale to consumers, other firms and various government departments. In this article we will discuss about the Theoretically Analysis of the Production Process.

Production process