Production in Economics – Definition, Types and importance
Production is any economic activity that is aimed at the creation of goods and services for the satisfaction of human wants. The production also includes the distribution of goods to the final consumers. Production involves the creation of tangible goods such as books, vehicles furniture items, bags, footwear, etc as well as services (intangible goods) that are capable of satisfying human wants e g services of teachers, lawyers, security officers medical personnel, etc.
Concept of Production
Production in Economics can be defined as the process of converting inputs into outputs. Inputs include land, labor, and capital, whereas output includes finished goods and services. In other words, Production in Economics is an act of creating value that satisfies the wants of individuals.
Organizations engage in production for earning a maximum profit, which is the difference between cost and revenue. Therefore, their production decisions depend on the cost and revenue. The main aim of production is to produce maximum output with given inputs.
Definition of Production:
According to Bates and Parkinson:
“Production is the organized activity of transforming resources into finished products in the form of goods and services; the objective of production is to satisfy the demand for such transformed resources”.
According to J. R. Hicks:
“Production is any activity directed to the satisfaction of other peoples’ wants through an exchange”.
Production is broadly divided into two: Direct Production and Indirect Production
Direct production has to do with economic activities aimed at meeting household needs. It is usually carried out on small scale, employing mostly family labor. Examples are crop farming, poultry, fishing, etc for household consumption only.
Indirect Production: This involves the production of goods and services on large scale for commercial purposes. Modern equipment and skilled labor are often engaged. The producer makes use of the proceeds of his sales to satisfy his other wants since he cannot produce all he needs.
Production is classified into three stages:
- Primary production
- Secondary production
- Tertiary production
(a) Primary production: This refers to the production of basic raw materials to be used in their natural form or for the production of other goods. It involves majorly the extraction of raw materials from the land, sea, and air. Examples are mining, quarrying fishing, and forest activities.
(b) Secondary production: This is the stage of production where raw materials or semi-finished goods satisfy consumers’ wants. This includes production in the manufacturing industry, viz., turning out semi-finished and finished goods from raw materials and intermediate goods— conversion of flour into bread e.t.c. They are generally described as manufacturing and construction industries, such as the manufacture of cars, furnishing, clothing, and chemicals, as also engineering and building.
(c) Tertiary production: this involves the production of services. Those engaged in distributive trade and service professionals complete the production process by making goods and services produced at the primary and secondary stages reach the final consumer where and when they are needed e g teaching, medical service, insurance, legal service, banking, etc.
Importance of Production
Production in Economics is considered very important by organizations. The importance of Production is as follows:
- Helps in creating value by applying labor on land and capital
- Improves welfare as more commodities mean more utility
- Generates employment and income, which develops the economy.
- Helps in understanding the relationship between cost and output