Production process is the process of combining inputs, utilising their services and making production of goods and services. The entrepreneur organizes the production activities for which he earns profit or bears loss.
There are two types of technologies of production (i) labour intensive in which we make more use of labour and less use of capital (ii) capital intensive in which we make more use of capital and less use of labour.
Division of labour is of two types:
- Product based division of labour in which a worker specializes in the production of a commodity.
- Process based division of labour in which the production of a commodity is divided into different processes and a worker specializes in one or two processes only.
Production is the result of the combined efforts of all the four factors of production i.e. land, labour, capital and entrepreneurship.
Total Product (TP) refers to the total quantity of output of a commodity at a particular level of employment of an input, say labour, when the employment of all other inputs is unchanged. Average Product (AP) is the output per unit of a variable input, say labour.
Marginal Product (MP) may be defined as increase or decrease in TP resulted due to addition of one extra unit of labour, keeping all other inputs unchanged. Law of diminishing Marginal Product of labour state that with continuous increase in the variable factor labour, its marginal product will increase initially till certain point is reached, but after that it will decrease and may become negative, keeping all other factors unchanged.
On the basis of ownership production units are classified into indigenous and foreign production units. Indigenous units are owned by residents of the country and foreign units are owned by non-residents. Indigenous units are further classified into private and public sector production units. Private units are owned by private persons and institutions. Public sector units are owned by government.
Cost
Cost is the expenditure incurred to produce a good or service during the production process. Fixed cost is defined as the expenditure on the fixed factors of production. Variable cost is the expenditure on variable factors.
Explicit cost is defined as the money expenditure incurred by the producer for production. Implicit cost is the cost of self supplied factors. Average Cost is the cost per unit of output.
Revenue
Revenue is the amount a person receives by selling certain quantity of the commodity at a given price.
Average Revenue = Total Revenue/Quantity
Marginal Revenue is the change in total revenue due to change in the sale of quantity of output by one unit.
Profit = Total Revenue - Total Cost