CA Foundation Business Economics Study Material Chapter 3 Theory of Production and Cost – Meaning of Production

Meaning of Production

  • Production is one of the important economic activity that takes place in any economy apart from consumption and investments.
  • An individual firm is the micro-economic unit which undertake the production of goods and services.
  • A firm’s survival depends upon whether it is able to achieve optimum efficiency in production by minimizing the cost of production.
  • Production is the transformation of resources into goods and services. In other words, production is the act of transformation of INPUTS into OUTPUT which satisfies the wants of some people.
    E.g.- Inputs of sugarcane, capital and labour are used to produce SUGAR.
    Production also includes production of SERVICES like those of lawyers, teachers, doctors, etc.
  • The amount of goods and services that an economy is able to produce determines whether it is rich or poor. A country like U.S.A. is a rich country as its production level is high.
  • Man cannot create or destroy matter.
  • In Economics, the term production means creation of economic utilities in the matter i.e. in the things that already exist.
  • Thus, production means creation of those goods and services which have economic utilities i.e. exchange value.
  • According to James Bates and J.R. Parkinson, “Production is the organized activity of transforming resources into finished products in the form of goods and services; and the objective of production is to satisfy the demand of such transformed resources.”
  • Professor J. R. Hicks has defined production “as any activity whether physical or mental, which is directed to the satisfaction of other people’s wants through exchange.”
  • The definition indicates that the term production covers the whole process from creation of utilities till the satisfaction of human wants.

Utilities may be created or added in many ways, such as :-

1. Form Utility

  • It is created by changing the form of raw materials into finished goods for man’s use.
  • E.g. converting raw cotton into cotton fabric.
  • Form utility is created by manufacturing industries.

2. Place Utility

  • It is created by transporting goods from one place to another.
  • E.g. when goods are taken from factory to marketplace, place utility is created.
  • Transport services are involved in creation of place utility.

3. Time Utility

  • It is created by making things available when they are required.
  • E.g. Banks create time utility by granting overdraft facilities.

4. Service Utility (Personal Utility)

  • It is created by providing personal services to the customers by professionals likes lawyers, doctors, bankers, shopkeepers, teachers, transporters, etc