Ch 7 production

Productionis defined as changing of inputs into outputs.

The goal of production is to satisfy wants.

Producer and Production

• The Producer brings together the factors like Land, Labour, capital and entrepreneurship along with raw materials in order to make goods and services.

• The Producer produces maximum quantity of goods at minimum cost per unit.

Inputs and Outputs• The resources used in production are called inputs

and the goods and services produced are called the outputs.

• For example for the production of rice, we require land, seeds, fertilizers, tools, water, tractor etc.

• All these are inputs which go into the production process to produce the output RICE.

Production Function

• 1) Production function gives the relationship between inputs and outputs of a firm.

• 2) It gives the maximum quantity of output that can be produced with the given quantity of inputs.

Different technologies of ProductionProduction activity can be organised in 2 ways

Method/Technology of Production Division of Labour (DOL)

Labour IntensiveTechnology

Capital Intensive Technology

Product based DOL

Process based DOL

Division of Labour increases the efficiency of workers and leads to inventions and discoveries.

Mr Rajan’s Problem• Let me introduce you to Mr Rajan.

• He wishes to start a factory and would like to know how many labourers he should keep.

• Let us see if we can help him…..

• First let us see with every increase in labour(input) how the total quantity produced changes.

• We will start with 1 labourer and then we will keep adding one extra labourer.

Labour (L)Employed in production

Total Production (TP)With given Labour

0 0

10

22

36

44

1

2

3

4

5

6

7

8

9

10

54

50

56

56

54

50

Total Product

• We learnt that :• Total Product( TP) refers to the total quantity of output produced

with the given quantity of labour.

• TP depends on quantity of labour used.

• TP can be increased or decreased with increasing and decreasing the units of labour.

Average product

• We saw that as the No. of Labourer increases the Total Product also changes.

• In the beginning it increases then becomes same and then starts decreasing.

• Let us divide the total output with the no. of labourers and see how much is the average quantity produced by each labour .

The average product is got by dividing total production by the number of units of variable input(Labour) employed. AP = ( TP/L)

1 10 boxes 10/1 = 10

2 22 boxes 22/2 = 11

3 36 boxes 36/3 = 12

4 44 boxes 44/4 = 11

5 50 boxes 50/5 = 10

6 54 boxes 54/6 = 9

7 56 boxes 56/7 = 8

8 56 boxes 56/8 = 7

9 54 boxes 54/9 = 6

10 50 boxes 50/10 = 5

Findings…• Here we saw that :• Labourer Total Product Average Product• when L =1, TP=10, AP = 10 (this is because it

was the first production).

• When L= 3, TP=36, AP= 12 (AP highest)

• When L=4, TP=44, AP= 11 ( AP has started to fall)

• When L=7, TP=56, AP= 8 (TP highest)

• When L=8, TP=56, AP= 7 (TP highest and the average fell to 7)

• When L=9, TP=54, AP= 6 (TP decreases and AP also decreases).

Marginal Product.

• Now let us see one more study i.e. Marginal Product.

• The marginal product (MP)may be defined as the addition made to TP by increasing an extra unit of labour.

• i.e. by increasing one additional labour , how much quantity did this additional labour add to the Total product.

Law of Diminishing Marginal Product of Labour

• With every increase in labour for the first 3 units of labour MP increases.

Then it starts to decreases un till at L=8 it is 0 and at L= 9 it becomes negative.

So we can say…With every increase in labour,

the marginal Product will increase in the beginning till a certain point is reached,

after that it will decrease and may become negative.

This is called the Law of Diminishing Marginal Product of Labour.

Conclusion of our report for Mr Rajan

• We learn that increase in variable factor(Labour)

should take place till the point where Marginal Product becomes minimum

and stop employing further

before marginal product becomes negative.

• STOP WHEN TP IS MAXIMUM AND MP IS MINIMUM(BEFORE NEGATIVE)

• So we must advice Mr Rajan that Labour should be stopped before 9 i.e. at 8 • AT L= 8 the Total output is 56 is maximum and the MP is minimum at 0.

Let us try one more ….Units of Labour TP AP(TP/L) MP

0 0

1 10

2 18 (18/2)

3 24 (24-18)

4 28 (28/4)

5 30 (30-28)

6 28

Role of Importance of Firms and Industries

• A Firm is an individual production unit which produces goods and services for sale in the market.

• It provides:– Goods and services for consumption.

– Goods for investment

– Employment to many

– Infrastructure for the development of the country.

Production Units

Indigenous Production units Foreign Production Units

Private Prod. Units Government Prod Units

Sole Proprietorship

Partnership

Company or Corporations

Private non-profit organisation

Multinationals Collaborations

Co-operative society

Departmental Enterprise

Non-Departmental Enterprises

Various types of producers• Indigenous production units:• Production unit located in a country and owned by the residents of the

country are called indigenous production.

• Eg : Farmhouses in the villages, Hospitals, small factories.

• These are further divided into :– Private production units and – Government Production units.

Private Production Units

• Shops, Offices, Factories owned by private persons or groups.

• They produce goods and services with the aim of earning profit.

• They can further be classified on the basis of number of owners:

Sole Proprietorship (Sole- one; proprietor- owner)

• A Production unit owned by a single person.

• The single owner is responsible for the management of the unit.

• The owner pockets all the profits and bears all the losses.

• Responsible for managing and working of the production unit

Partnership• Owned by 2 or more(maximum 20)

• Owners are called partners

• All partners are collectively(together) responsible for managing and working of the production unit

• Share and loss distributed among partners as per agreement made at the time of forming the partnership

Company or Corporations

• Owned by large number of persons.• The sum invested is divided into shares.• The buyers of the shares are called shareholders.• They are all the owners of the company.• Minimum number of shareholders 2• Maximum number 50.• (In a Public Limited company Minimum is 7 and max is no limit)• They select a Director.• Profit divided among shareholders.• Established under companies act 1956.• E.g. Reliance industries limited, Bajaj Auto Limited

Cooperative Societies

• Production unit managed by a number of persons.

• Its aims are achieved through self help and collective efforts.• Its owners are called shareholders.• It is registered under the Indian Co-operative societies Act of 1912.• The minimum number of owners is 10 , max no limit.• The Profits are divided among shareholders.• They sell goods at reasonable rates.• 3. Examples – AMUL, Apna Bazaar etc.

Private non-profit organizations.

• They are run by institutions, trusts, societies etc. like charitable hospitals, charitable schools, welfare societies etc.

Government Production units

• Departmental Enterprises: Government provides services like education etc, and they have direct control over the functioning of these enterprises. They are called Government Departmental enterprises

• Government provides services– Education– Healthcare– Law and order– Post and telegraph– Transport– Telecommunications– Broadcasting

• E.G. All India Radio, Doordarshan, Ministry of railways, Ministry of Information and Broadcastings.

• There are production units which supported and funded by the government but function independently(government does not have direct control over them).

• They are non-departmental enterprises and are called Public Sector undertakings.

• E.g : Hindustan Machine Tools(HMT)– Life insurance corporation(LIC)– General Insurance corporation(GIC)– Indian Oil corporation(IOC) etc.

Foreign Production• Production unit located in the country but owned by foreigners or non-

residents of the country.• Contribution of foreigners must be more than 50% of total capital.• They are further classified as :

Multinationals(MNC): They have their main office in one country but their business activities are spread in many countries.eg. Coco-cola, Pepsi, Nokia, Samsung, Acer etc.

Collaborations: Production unit in which foreigners and domestic entrepreneurs participate jointly.(partly indigenous & partly foreign)If 50% of total capital is owned by foreigners it is a foreign production unit. Eg. Maruti-Suzuki Limited.

Question review• A production unit owned by a single individual ?

Sole Proprietorship• In a partnership the maximum number of partners?

20• Indian railways is a : Private unit, Public unit, Sole proprietorship, Partnership ?

Public• Minimum number in a cooperative society is ?

10• Maximum number of shareholders in a public company is ?

No limit• The minimum number of owners in a private company?

2• A production unit have more than 50% of the total capital invested by non-

residents? Foreign Production unit.

Distinguish between

Firm Industry 

1. It is a single production unit which produces a good or service.

1. It is a group of firms producing the same good or service.

2. Examples – Bata, Liberty, Reebok, Adidas. 2. Examples – shoe industry includes Bata, Liberty, Reebok and Adidas.

Labour intensive 

Capital intensive

1.It uses more of labour and less of capital. 1. It uses more of capital and less of labour. 

2. It is mainly used in small scale industries. 2. It is mainly used in large scale industries. 

3. Examples- garment factory, pot making, wood carving etc. 3. Examples- iron & steel industry, cement industry, automobile industry.

Product based Process based 

1. Worker specializes in the production of a single good.

1. Worker specializes in one or two processes in the entire production of a good.

2. This is used in small scale production. 2. This is used in large scale production. 

3. Examples- potter, cobbler, carpenter, farmer etc. 3. Examples- bread production, chocolate production tec.

Indigenous unit Foreign unit 

1. These units are owned by residents of a country. 1. These units are owned by non-residents.

2. These units can be further classified as private and public units.

2. These units can be further classified as multinational and collaboration.

3. Examples – shops, factories, cinema halls etc. 3. Examples – Microsoft, LG, Sony etc. 

Sole Proprietorship Partnership

1. This is owned by a single person. 1. This can have a minimum of 2 owners and a maximum of 20.

2. The single owner is responsible for the management of the unit.

2. All partners are together responsible for management of the unit.

3. The owner pockets all the profits and bears all the losses.

3. Profits and losses are shared by all the partners.

Departmental Non-Departmental

1. These are under the direct control of some government ministry.

1. These are independent units.

2. Parliament has direct control over their functioning.

2. Parliament does not have control over their functioning.

3. Examples – Indian Railways comes under the Ministry of railways; Doordarshan comes under the ministry of Information and Broadcasting.

3. Examples – State Bank of India, Life Insurance Corporation of India, Oil and Natural gas Commission(ONGC).

Statutory Corporation Company 1. it is formed under the Special Act of State Legislative Assemblies.

1. It is formed under the Indian Companies Act of 1956.

2. Examples – SBI, LIC, ONGC etc. 2. Examples – Hindustan Steel Ltd., Indian Telephone Industries etc.

Multinational Collaboration

1. This has it’s main office in one country and branches in other countries.

1. This is a joint venture between an indigenous unit and a foreign unit.

2. This operates in many countries. 2. This operates in one country. 

3. Examples – Microsoft, Sony, Samsung, LG. 3. Examples – Kawasaki Bajaj, Maruti Suzuki. 

Got it…. GOOD!!