Lesson 7: Production & Production Function
Production is the result of combining inputs (Land, Labour, Capital, Entrepreneurship) to create output. Understanding production technology, division of labour, output measures (TP, AP, MP), and producer ownership structures is key to economics.
Concept of Production Function
Production is defined as the transformation of inputs into output. Resources used in production are called inputs, and finished goods/services are called output.
- Rice Farming: Land + seeds + fertilizers + water + plough + diesel + labour combined to harvest rice output.
- Tailoring Shop: Measurement master + sewing machines + tailors combined in fixed ratios to stitch shirts and pants.
Technologies of Production & Division of Labour
1. Production Technologies
Labour-Intensive Technology: Uses more labour and less capital per unit of output. Found in household units, handlooms, small-scale farming for self-consumption.
Capital-Intensive Technology: Uses more capital (machines) and less labour per unit of output. Found in corporations, powerlooms, large-scale factories, and government enterprises.
2. Division of Labour Types
Product-Based Division: A worker specializes in making an entire single good/service (e.g., potter making pots, cobbler, small farmer).
Process-Based Division: Production is split into multiple processes; workers specialize in 1-2 processes (e.g., Britannia Bread manufacturing: dough $\rightarrow$ baking $\rightarrow$ slicing $\rightarrow$ packing; street lighting installation).
Total Product (TP), Average Product (AP) & Marginal Product (MP)
Labour ($L$) is the variable factor. $TP$ is total output; $AP = \frac{TP}{L}$ is output per unit of labour; $MP = TP_L - TP_{L-1}$ is the extra output from adding one more labourer.
| Units of Labour ($L$) | Total Product ($TP$) | Average Product ($AP = \frac{TP}{L}$) | Marginal Product ($MP = TP_L - TP_{L-1}$) | Production Behavior |
|---|---|---|---|---|
| 0 | 0 | - | - | No employment |
| 1 | 10 | 10.0 | 10 | Increasing MP Phase |
| 2 | 22 | 11.0 | 12 | Increasing MP Phase |
| 3 | 36 | 12.0 | 14 (Peak MP) | Maximum MP point |
| 4 | 44 | 11.0 | 8 | Diminishing MP Phase |
| 5 | 50 | 10.0 | 6 | Diminishing MP Phase |
| 6 | 54 | 9.0 | 4 | Diminishing MP Phase |
| 7 | 56 | 8.0 | 2 | Diminishing MP Phase |
| 8 | 56 (Peak TP) | 7.0 | 0 (Zero MP) | Optimal Stopping Level |
| 9 | 54 | 6.0 | -2 | Negative Returns (Stop!) |
| 10 | 50 | 5.0 | -4 | Negative Returns (Stop!) |
Law of Diminishing Marginal Product of Labour
Law Statement: With continuous increase in the variable factor (labour), its marginal product ($MP$) will increase initially up to a certain point, but after that, it will decrease and eventually become negative, keeping fixed factors (capital/machinery) unchanged.
Where should the producer stop hiring? The producer should employ labour up to 8 units where $MP = 0$ and $TP$ reaches maximum ($56$ units). Hiring beyond 8 units causes $MP$ to become negative and total product to fall.
Firm vs. Industry & Ownership Classification
Firm: An individual production unit producing goods/services for profit (e.g., Bata Shoe Company).
Industry: A group of ALL firms producing identical commodities (e.g., Shoe Industry = Bata, Action, Liberty, Adidas, Nike, Reebok).
- • Sole Proprietorship: 1 owner, handles all profit/loss.
- • Partnership: 2 to 20 owners (partners).
- • Corporations: Private (2 to 50 shareholders), Public (Min 7, No Upper Limit). Registered under Companies Act 1956.
- • Cooperative Society: Min 10 shareholders, voluntary (Cooperative Societies Act 1912).
Departmental Enterprises: Run directly by Ministry/Department (e.g., Indian Railways, All India Radio, Doordarshan).
Public Sector Undertakings (PSUs): Autonomous non-departmental corporations (e.g., LIC, IOC, HMT, MMTC).
Multinationals (MNCs): Head office in one country, operations across multiple nations (e.g., Coca-Cola, Pepsi, Samsung, Sony, Microsoft).
Collaborations: Joint domestic + foreign ownership where foreign capital > 50% (e.g., Maruti-Suzuki Limited).