PRODUCTION LINKAGES Eco

PRODUCTION LINKAGES
Production: Meaning, Definition, Types and Factors

Meaning of 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

organizing and facilitating production. The essential characteristics of the business
firm is that it purchases factors of production such as land, labor, 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 organized 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.
FACTORS OF PRODUCTION
Factors of production refers to anything that is used to produce goods and

services. There are four kinds of factor of production namely: land, labor, capital
and entrepreneur. In order to achieve the development of an economy, factors of
production should be used together. One factor should go hand in hand to ensure
the success in the business
1. Land – is the natural factor of production

2. Wages - amount of money received by workers as payment for their
services.
3. Interest – payment received by the capitalist for lending his money used in
production.
4. Profit- entrepreneur receives this payment after deducting all his expenses in
the operation of the business.
5. Capital – refers to the material things created by man, which are used in
production like tools machineries, equipment’s to be used in production.
6. Financial capital- money used as to buy machineries and other equipment’s.
7. Entrepreneur- the captain of the business.
8. Investment- is the addition of productive capital in the business.
9. Labor- is the physical or mental talents of people abilities and strength used
in production.
THE STAGES OF PRODUCTION
The laws of Variable Production
occur in a short run production period where only the variable input is changing
while fixed input is constant.
FIXED VARIABLE TOTAL AVERAGE MARGINAL

INPUT INPUT PRODUCT PRODUCT PRODUCT
FI VI TP AP MP
1 1 12 12 -
1 2 30 15 18
1 3 49 16.33 19
1 4 58 14.5 9
1 5 65 13 7
1 6 98 16.33 33
1 7 25 3.57 -73
1 8 63 7.88 38
1 9 98 10.89 35
1 10 120 12 22
THE PRODUCTION COST

It includes all payment factors of production like rent, interest, permit and
other expenses.
1. Fixed Cost
a. Total Fixed Cost (TFC) – is the sum of all expenses for the
payment of the fix input.
2. Variable Cost
a. Total Variable cost (TVC)- refers to the cost that goes with
the level of production. It is a cost that can be controlled by a
businessman
3. Total Cost (TC) – this is the sum of all cost. This is the total expenses
in goods and services.
COST for EVERY PRODUCT
For every businessman and producers, it is necessary to know the cost of

every product in order to set the selling price of the product.
1. Average Fixed Cost (AFC) – refers to expenses in every production.

2. Average variable Cost (AVC) – it is the average cost of every variable cost.
3. Average Total Cost (ATC)- it is the sum of all average cost.
4. Marginal Cost (MC) – this is the established cost for every production.
PRODUCTION COST IN A SHORT RUN MARKET
PRODUCTION COST IN A SHORT RUN MARKET

TOTAL TOTAL TOTAL TOTAL AVERAGE AVERAGE AVERAGE MARGINAL
PRODUCT FIXED VARIABLE COST FIXED COST VARIABLE TOTAL COST
COST COST COST COST
TP TC AFC MC
TFC TVC AVC ATC
0 60 65 125 60 65 125 -
2 60 125 185 30 62.5 92.5 60
3 60 102 162 20 34 54 -23
4 60 96 156 15 24 39 -6
5 60 154 214 12 30.8 42.8 58
6 60 221 281 10 36.83 46.83 67
7 60 358 418 8.58 51.14 59.72 200
8 60 189 249 7.5 23.63 31.13 -169
9 60 325 385 6.67 36.11 42.78 136
10 60 418 478 6 41.8 47.8 93

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PRODUCTION LINKAGES

Production: Meaning, Definition, Types and Factors

Since the primary purpose of economic activity is to produce utility for

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

They are artificial entities created by individuals for the purpose of

According to Bates and Parkinson:

“Production is the organized activity of transforming resources into finished

“Production is any activity directed to the satisfaction of other peoples’ wants

Factors of production refers to anything that is used to produce goods and

1. Land – is the natural factor of production

The laws of Variable Production

FIXED VARIABLE TOTAL AVERAGE MARGINAL

THE PRODUCTION COST

COST for EVERY PRODUCT

For every businessman and producers, it is necessary to know the cost of

1. Average Fixed Cost (AFC) – refers to expenses in every production.

PRODUCTION COST IN A SHORT RUN MARKET

PRODUCTION COST IN A SHORT RUN MARKET

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