RBSE Class 12 Economics Notes Chapter 7 Concept of Production

Rajasthan Board RBSE Class 12 Economics Notes Chapter 7 Concept of Production

Production can be defined as creation or addition of utility, making of goods or providing any services.

Fraser stated that reestablishment of utility is called Production.

According to Gerald W. Stone, “Production is the process of converting inputs into outputs”. Production is a type of flow of goods and services.

There are four methods of production :

  1. Form utility
  2. Place utility
  3. Time utility,
  4. Personal utility.

Factors which are used as means in production are called Factors of Production, like land, labour, capital and entrepreneurship.

RBSE Class 12 Economics Notes Chapter 7 Concept of Production Notes

All free gifts of nature are called Land in the language of economics.

Labour is a physical and mental effort of human being in the process of production for economic purpose.

Capital is man-made material source of production. Capital consists of that part of production which is used for further production.

The entrepreneur owns entrepreneurship. He is that man of production who takes decisions and bears risk. He has also been called the Organizer, the Manager or Risk-taker. Total production is the total output resulting from the efforts of all the factors of production combined together at any time.

Average production or average physical product can be defined as total product per unit employment of the variable unit.

Average production increases slowly and decreases slowly in comparison to marginal production.

RBSE Class 12 Economics Notes Chapter 7 Concept of Production Notes

Marginal production is the change in total production due to change in the unit quantity of a variable factor, i.e. labour.

Marginal production Shows the immediate change of output. Changes of marginal production are always more than changes of average product.

A rational producer attains equilibrium in second stage only.

According to F. Benham, “As the proportion of one factor in a combination of factors is increased, after a point, first the marginal and then the average production of that factor will diminish.”

Long period or long-run is defined as the period of time in which all the factors of production or inputs are variable.

Law of variable proportions states that as more and more units of a variable factor are combined with same quantity of fixed factors, total production first increases at an increasing rate, then at diminishing rate and finally starts diminishing.

According to Mrs. Joan Robinson, “The law of diminishing returns, as is usually formulated, states that with a fixed amount of any one factor of production, success in increase in the amount of other factor will, after a point, result into a diminishing increment rate of Output.”

It denotes that marginal production first increases and then decreases eventually.

RBSE Class 12 Economics Notes Chapter 7 Concept of Production Notes

Law of returns to a factor is the another name of law of variable proportion. This is a short term-concept.

The law which studies the relationship between one variable factor of production and the output, keeping the quantities of other factors fixed, is called the Law of Variable Proportion.

According to P.A. Samuelson, “An increase in some inputs relative to other fixed inputs will, in a given state of technology, cause output to increase; but after a point, the extra output resulting from the same additions of extra inputs will become less and less.”

The application of the law of diminishing return is subject to certain assumptions, which are the following:

  1. The state of technology is given, it does not change during the course of application of the law.
  2. Input costs remain unchanged.
  3. The fixed factor is indivisible.

In terms of Cairns, “In the absence of the law of diminishing returns, the science of political economy would be as completely revolutionized as if human nature itself were altered.”

The laws of diminishing returns find a use in the optimum theory of population also. In the production process, an ideal combination of the various factors of production yields the maximum output and the optimum population gives the ideal proportion of labour which combines with the other factors to give the maximum produce.

RBSE Class 12 Economics Notes Chapter 7 Concept of Production Notes

Increasing returns to scale is the first stage of production when-a propQrtionate increase in all factors of production results in a more than proportionate increase in output.

Constant returns to scale refers to the production situation in which output increases exactly in the same proportion in which factors of production are increased.

Decreasing return to scale implies that a proportionate increase in all factors of production results in a less than proportionate increase in output.

Production curves can help identifying the rational and irrational stages of operation. It can also provide answer to such questions as

  1. how much to produce, and
  2. what number of workers to apply to a given fixed input, so that, given all other factors output is optimum.

The opinion of Prof. Nurkse is that the surplus labour possesses ‘concealed saving potential’.

Decreasing returns to scale eventually occur because of the increasing difficulties of management, coordination and control.

Homogeneous production function of the first degree implies that if all factors of production are increased in a given proportion, output also increases in the same proportion.

RBSE Class 12 Economics Notes Chapter 7 Concept of Production Notes

Internal economy means the reductions in cost or cost advantages that occur when a firm expands itself, that is, when it increases its own size by installing bigger plants. Therefore, these internal economies are also called Economies of Large Scale Production.

When the size of a firm becomes too large, certain factors operate that cause increase in unit cost of production.

These increases in unit cost of production that occur due to expansion of a firm beyond a certain point are called Internal Diseconomies.

External economies and diseconomies are those economies and diseconomies which accrue to the firms as a result of the expansion in the output of the whole industry and they are not dependent on the output level of individual firms.

RBSE Class 12 Economics Notes Chapter 7 Concept of Production Notes

Important Glossary

  1. Production : Production means an activity through which, resources (man, material, time, etc.) are transformed into a different and more useful commodity or service with added value.
  2. Land : Land means all free gifts of nature which would include besides the land, in common parlance, natural resources, water, air, light, heating, mines and fertility of soil, etc.
  3. Labour: Labour is a physical or mental effort of human being in the process of production for economic purpose.
  4. Capital: Capital is man-made material source of production. Capital consists of that part of production, which is used for further production.
  5. Short-term : Short term is a period in which some factors are fixed and some factors are variable.
  6. Long-term : Long term is a period in which all factors can be varied.
  7. Organisation or Management: Putting the various means of production at the right time, in the right quantity, and in the right place is called Organisation or Management.
  8. Enterprise : The courage to bear the risk inherent in the activity of production is called enterprise.
  9. Total Production : The total production done in a definite period of time with the help of means of production, is called total production.
  10. Average Production: If the total production is divided by the units of employed variable means, the average production is obtained.
  11. Marginal Production : The increase in total production due to increase of one unit of a variable means, is called the marginal production of that means:
  12. Equilibrium Point: The level of production at which the cost of production is minimum, is called the Equilibrium Point.

RBSE Class 12 Economics Notes