Production (economics)
Production is the process of combining various inputs, both material and immaterial in order to create output. Ideally, this output will be a good or service which has value and contributes to the utility of individuals. The area of economics that focuses on production is called production theory, and it is closely related to the consumption theory of economics.
The production process and output directly result from productively utilising the original inputs. Known as land, labor, capital and entrepreneurship, these are deemed the four fundamental factors of production. These primary inputs are not significantly altered in the output process, nor do they become a whole component in the product. Under classical economics, materials and energy are categorised as secondary factors as they are byproducts of land, labour and capital. Delving further, primary factors encompass all of the resourcing involved, such as land, which includes the natural resources above and below the soil. However, there is a difference between human capital and labour. In addition to the common factors of production, in different economic schools of thought, entrepreneurship and technology are sometimes considered evolved factors in production. It is common practice that several forms of controllable inputs are used to achieve the output of a product. The production function assesses the relationship between the inputs and the quantity of output.
Economic welfare is created in a production process, meaning all economic activities that aim directly or indirectly to satisfy human wants and needs. The degree to which the needs are satisfied is often accepted as a measure of economic welfare. In production there are two features which explain increasing economic welfare. The first is improving quality-price-ratio of goods and services and increasing incomes from growing and more efficient market production, and the second is total production which help in increasing GDP. The most important forms of production include market production, public production and household production.
In order to understand the origin of economic well-being, we must understand these three production processes. All of them produce commodities which have value and contribute to the well-being of individuals. The satisfaction of needs originates from the use of the commodities which are produced. The need satisfaction increases when the quality-price-ratio of the commodities improves
and more satisfaction is achieved at less cost. Improving the quality-price-ratio of commodities is to a producer an essential way to improve the competitiveness of products but this kind of gains distributed to customers cannot be measured with production data. Improving product competitiveness often means lower prices and to the producer lower producer income, to be compensated with higher sales volume.
Economic well-being also increases due to income gains from increasing production. Market production is the only production form that creates and distributes incomes to stakeholders. Public production and household production are financed by the incomes generated in market production. Thus market production has a double role: creating well-being and producing goods and services and income creation. Because of this double role, market production is the "primus motor" of economic well-being.
Elements of production economics
The underlying assumption of production is that maximisation of profit is the key objective of the producer. The difference in the value of the production values and costs is the calculated profit. Efficiency, technological, pricing, behavioural, consumption and productivity changes are a few of the critical elements that significantly influence production economically.Efficiency
Within production, efficiency plays a tremendous role in achieving and maintaining full capacity, rather than producing an inefficient level. Changes in efficiency relate to the positive shift in current inputs, such as technological advancements, relative to the producer's position. Efficiency is calculated by the actual output divided by the maximum potential output. An example of the efficiency calculation is that if the applied inputs have the potential to produce 100 units but are producing 60 units, the efficiency of the output is 0.6, or 60%. Furthermore, economies of scale identify the point at which production efficiency can be increased, decrease or remain constant.Technological changes
This element sees the ongoing adaption of technology at the frontier of the production function. Technological change is a significant determinant in advancing economic production results, as noted throughout economic histories, such as the industrial revolution. Therefore, it is critical to continue to monitor its effects on production and promote the development of new technologies.Behaviour, consumption and productivity
There is a strong correlation between the producer's behaviour and the underlying assumption of production – both assume profit maximising behaviour. Production can be either increased, decreased or remain constant as a result of consumption, amongst various other factors. The relationship between production and consumption is mirror against the economic theory of supply and demand. Accordingly, when production decreases more than factor consumption, this results in reduced productivity. Contrarily, a production increase over consumption is seen as increased productivity.Pricing
In an economic market, production input and output prices are assumed to be set from external factors as the producer is the price taker. Hence, pricing is an important element in the real-world application of production economics. Should the pricing be too high, the production of the product is simply unviable. There is also a strong link between pricing and consumption, with this influencing the overall production scale.As a source of economic well-being
In principle there are two main activities in an economy, production and consumption. Similarly, there are two kinds of actors, producers and consumers. Well-being is made possible by efficient production and by the interaction between producers and consumers. In the interaction, consumers can be identified in two roles both of which generate well-being. Consumers can be both customers of the producers and suppliers to the producers. The customers' well-being arises from the commodities they are buying and the suppliers' well-being is related to the income they receive as compensation for the production inputs they have delivered to the producers.Stakeholders of production
Stakeholders of production are persons, groups or organizations with an interest in a producing company. Economic well-being originates in efficient production and it is distributed through the interaction between the company's stakeholders. The stakeholders of companies are economic actors which have an economic interest in a company. Based on the similarities of their interests, stakeholders can be classified into three groups in order to differentiate their interests and mutual relations. The three groups are as follows:Customers
The customers of a company are typically consumers, other market producers or producers in the public sector. Each of them has their individual production functions. Due to competition, the price-quality-ratios of commodities tend to improve and this brings the benefits of better productivity to customers. Customers get more for less. In households and the public sector this means that more need satisfaction is achieved at less cost. For this reason, the productivity of customers can increase over time even though their incomes remain unchanged.
Suppliers
The suppliers of companies are typically producers of materials, energy, capital, and services. They all have their individual production functions. The changes in prices or qualities of supplied commodities have an effect on both actors' production functions. We come to the conclusion that the production functions of the company and its suppliers are in a state of continuous change.
Producers
Those participating in production, i.e., the labour force, society and owners, are collectively referred to as the producer community or producers. The producer community generates income from developing and growing production.
The well-being gained through commodities stems from the price-quality relations of the commodities. Due to competition and development in the market, the price-quality relations of commodities tend to improve over time. Typically the quality of a commodity goes up and the price goes down over time. This development favourably affects the production functions of customers. Customers get more for less. Consumer customers get more satisfaction at less cost. This type of well-being generation can only partially be calculated from the production data. The situation is presented in this study.
The producer community earns income as compensation for the inputs they have delivered to the production. When the production grows and becomes more efficient, the income tends to increase. In production this brings about an increased ability to pay salaries, taxes and profits. The growth of production and improved productivity generate additional income for the producing community. Similarly, the high income level achieved in the community is a result of the high volume of production and its good performance. This type of well-being generation – as mentioned earlier - can be reliably calculated from the production data.
Main processes of a producing company
A producing company can be divided into sub-processes in different ways; yet, the following five are identified as main processes, each with a logic, objectives, theory and key figures of its own. It is important to examine each of them individually, yet, as a part of the whole, in order to be able to measure and understand them. The main processes of a company are as follows:- real process.
- income distribution process
- production process.
- monetary process.
- market value process.
Real process generates the production output from input, and it can be described by means of the production function. It refers to a series of events in production in which production inputs of different quality and quantity are combined into products of different quality and quantity. Products can be physical goods, immaterial services and most often combinations of both. The characteristics created into the product by the producer imply surplus value to the consumer, and on the basis of the market price this value is shared by the consumer and the producer in the marketplace. This is the mechanism through which surplus value originates to the consumer and the producer likewise. Surplus values to customers cannot be measured from any production data. Instead the surplus value to a producer can be measured. It can be expressed both in terms of nominal and real values. The real surplus value to the producer is an outcome of the real process, real income, and measured proportionally it means productivity.
The concept "real process" in the meaning quantitative structure of production process was introduced in Finnish management accounting in the 1960s. Since then it has been a cornerstone in the Finnish management accounting theory.
Income distribution process of the production refers to a series of events in which the unit prices of constant-quality products and inputs alter causing a change in income distribution among those participating in the exchange. The magnitude of the change in income distribution is directly proportionate to the change in prices of the output and inputs and to their quantities. Productivity gains are distributed, for example, to customers as lower product sales prices or to staff as higher income pay.
The production process consists of the real process and the income distribution process. A result and a criterion of success of the owner is profitability. The profitability of production is the share of the real process result the owner has been able to keep to himself in the income distribution process. Factors describing the production process are the components of profitability, i.e., returns and costs. They differ from the factors of the real process in that the components of profitability are given at nominal prices whereas in the real process the factors are at periodically fixed prices.
Monetary process refers to events related to financing the business. Market value process refers to a series of events in which investors determine the market value of the company in the investment markets.