Production

Since the primary purpose of economic activity is to produce utility for individuals, we count as production during a time period all activity which either creates utility during the period or which increases ability of the society to create utility in the future.

Business firms are important components (units) of the economic system.

They are artificial entities created by individuals for the purpose of organising and facilitating production. The essential characteristics of the business firm is that it purchases factors of production such as land, labour, capital, intermediate goods, and raw material from households and other business firms and transforms those resources into different goods or services which it sells to its customers, other business firms and various units of the government as also to foreign countries.

Definition of Production

According to Bates and Parkinson

“Production is the organised 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 exchange”. This definition makes it clear that, in economics, we do not treat the mere making of things as production. What is made must be designed to satisfy wants.

What is not Production?

The making or doing of things which are not wanted or are made just for the fun of it does not qualify as production. On the other hand, all jobs which do aim at satisfying wants are part of production.

Those who provide services Such as hair-dressers, solicitors, bus drivers, postmen, and clerks are as much a part of the process of satisfying wants as are farmers, miners, factory workers and bakers. The test of whether or not any activity is productive is whether or not anyone will buy its end-product. If we will buy something we must want it; if we are not willing to buy it then, in economic terms, we do not want it.

Importance of Exchange

So from our above definition it is clear that many valuable activities such as the work done by people in their own houses and gardens (the so-called do it yourself exercise) and all voluntary work (such as free coaching, free-nursing, collection of subscription for a social cause such as flood-relief or earthquake- relief) immensely add to the quality of life but there is no practical way of measuring their economic worth (value).

This being so, and because in economics an important task is to measure changes in the volume of pro­duction, it is necessary to add the qualifying clause ‘through exchange’, i.e., in return for money, to the definition of production.

Three Types of Production

For general purposes, it is necessary to classify production into three main groups:

1. Primary Production

Primary production is carried out by ‘extractive’ industries like agriculture, forestry, fishing, mining and oil extraction. These industries are engaged in such activities as extracting the gifts of Nature from the earth’s surface, from beneath the earth’s surface and from the oceans.

2. Secondary Production

This includes production in manufacturing industry, viz., turning out semi-finished and finished goods from raw materials and intermediate goods— conversion of flour into bread or iron ore into finished steel. They are generally described as manufacturing and construction industries, such as the manufacture of cars, furnishing, clothing and chemicals, as also engineering and building.

3. Tertiary Production

Industries in the tertiary sector produce all those services which enable the finished goods to be put in the hands of consumers. In fact, these services are supplied to the firms in all types of industry and directly to consumers. Examples cover distributive traders, banking, insurance, transport and communications. Government services, such as law, administration, education, health and defence, are also included.

Processes in Production

We now know the meaning of production, that production creates or adds utility. There are various processes through which we can achieve the aim of utility creation or addition to ultimately satisfy human wants. These processes are as follows:

1. Utility of Form

The manufacturing processes that take physical inputs and produce physical outputs, eventually increasing the utility of the resource being manufactures, are integral branches in the production tree. These processes are the most obvious forms of production. They change the form of the goods under concern, in order to satisfy a greater human want.

For example, changing a log of wood into a table or chair is a manufacturing process. Further, such processes add to the utility of form of the raw materials.

2. Personal Utility

Unlike the manufacturing processes which are tangible, there are various intangible services that contribute towards the utility of the goods. For instance, apples have to be sold by merchants to consumers. The services of labor are also a part of this category. Such services are intangible but are as important as other processes of production. This imparts personal utility to the materials.

3. Utility of Place

Another process involves changing the place of the resources, to a place where they experience a greater demand and use.

• This includes the extraction of natural resources from earth e.g. mining of ores, gold, coal, metal ores, etc. These are further transported to markets where they can be sold.
• Transportation service from a place where the resource gives little satisfaction to a place where it provides a lot of satisfaction also adds up to the utility. For example, once extracted, the metal ore needs to be taken to an industrial site where it can be further processed. This concept is also known as the utility of place. This includes all the additional utility conferred through the efforts of transportation services or transport agents for the movement and marketing of goods.

4. Utility of Time

Lastly, storage and manipulating availability drastically change the utility of products. For example, seasonal fruits are canned and various preservation techniques are used for their storage so that they can be sold for higher prices during off-seasons.

Let’s take another example of umbrellas.  The demand for umbrellas touches the sky during monsoons.  In such a case, production of umbrellas takes place generally during the off-season and stored until the monsoon. At the advent of monsoon, the producers release their stocks of umbrellas to meet the increasing the demand. In this way, we add the utility of time through the process of production.

Let’s discuss an example where the addition of all the above-mentioned utilities takes place through production. First, the raw wool is sent to a mill for spinning and weaving (utility of form). Next, transportation of finished wool to potential market takes place (utility of place). Further, the demand for woolen clothes increases in winter, hence producers hold a majority of their stocks until winters (utility of time). Lastly personal services of transport agents, merchants, labors, etc. form an integral part of the whole process of production (personal utility).