In economics, an
effort to explain the principles by which a business firm decides how much of
each commodity that it sells (its "outputs" or "products")
it will produce, and how much of each kind of labour, raw material, fixed capital
good, etc., that it employs (its "inputs" or "factors of
production") it will use. The theory involves some of the most fundamental
principles of economics. These include the relationship between the prices of
commodities and the prices (or wages or rents) of the productive factors used
to produce them and also the relationships between the prices of commodities
and productive factors, on the one hand, and the quantities of these
commodities and productive factors that are produced or used, on the other.
Production
theory is the study of production, or the
economic process of converting inputs into outputs. Production
uses resources to create a good
or service
that is suitable for use, gift-giving
in a gift economy,
or exchange in a market
economy. This can include manufacturing, storing, shipping, and packaging.
Some economists define production broadly as all economic activity other than consumption.
They see every commercial activity other than the final purchase as some form
of production.
Production
is a process, and as such it occurs through time and space. Because it is a flow concept,
production is measured as a “rate of output per period of time”. There are
three aspects to production processes:
1.
the quantity of the good or service
produced,
2.
the form of the good or service
created,
3.
the temporal and spatial
distribution of the good or service produced.
A
production process can be defined as any activity that increases the similarity
between the pattern of demand for goods and services, and the quantity, form,
shape, size, length and distribution of these goods and services available to
the market place.
Production
is a process of combining various material inputs and immaterial inputs (plans,
know-how) in order to make something for consumption (the output). It is the
act of creating output,
a good or service
which has value
and contributes to the utility
of individuals.[1]
Economic
well-being is created in a production process, meaning all economic activities
that aim directly or indirectly to satisfy human needs. The degree to which the
needs are satisfied is often accepted as a measure of economic well-being. In
production there are two features which explain increasing economic well-being.
They are improving quality-price-ratio of commodities and increasing incomes
from growing and more efficient market production.
The
most important forms of production are
- market production
- public production
- household production
In
order to understand the origin of the economic well-being we must understand
these three production processes. All of them produce commodities which have
value and contribute to well-being of individuals.
The
satisfaction of needs originates from the use of the commodities which are
produced. The need satisfaction increases when the quality-price-ratio of the
commodities improves and more satisfaction is achieved at less cost. Improving
the quality-price-ratio of commodities is to a producer an essential way to
enhance the production performance but this kind of gains distributed to
customers cannot be measured with production data.
Economic
well-being also increases due to the growth of incomes that are gained from the
growing and more efficient market production. Market production is the only one
production form which creates and distributes incomes to stakeholders. Public
production and household production are financed by the incomes generated in
market production. Thus market production has a double role in creating
well-being, i.e. the role of producing developing commodities and the role to
creating income. Because of this double role market production is the “primus
motor” of economic well-being and therefore here under review.
Production as a source of economic well-being
In
principle there are two main activities in an economy, production and
consumption. Similarly there are two kinds of actors, producers and consumers.
Well-being is made possible by efficient production and by the interaction
between producers and consumers. In the interaction, consumers can be
identified in two roles both of which generate well-being. Consumers can be
both customers of the producers and suppliers to the producers. The customers’
well-being arises from the commodities they are buying and the suppliers’
well-being is related to the income they receive as compensation for the
production inputs they have delivered to the producers.
Stakeholders of production
Stakeholders
of production are persons, groups or organizations with an interest in a
producing company. Economic well-being originates in efficient production and
it is distributed through the interaction between the company’s stakeholders.
The stakeholders of companies are economic actors which have an economic
interest in a company. Based on the similarities of their interests,
stakeholders can be classified into three groups in order to differentiate
their interests and mutual relations. The three groups are as follows:
Interactive contributions of a
company’s stakeholders Customers
- Suppliers
- Producers.
The
interests of these stakeholders and their relations to companies are described
briefly below. Our purpose is to establish a framework for further analysis.
Customers
The
customers of a company are typically consumers, other market producers or
producers in the public sector. Each of them has their individual production
functions. Due to competition, the price-quality-ratios of commodities tend to
improve and this brings the benefits of better productivity to customers.
Customers get more for less. In households and the public sector this means
that more need satisfaction is achieved at less cost. For this reason the
productivity of customers can increase over time even though their incomes
remain unchanged.
Suppliers
The
suppliers of companies are typically producers of materials, energy, capital,
and services. They all have their individual production functions. The changes
in prices or qualities of supplied commodities have an effect on both actors’
(company and suppliers) production functions. We come to the conclusion that
the production functions of the company and its suppliers are in a state of
continuous change.
The
inputs or resources used in the production process are called factors of production by economists. The inputs are usually grouped into four
categories. These factors are:
- Raw material
- Labour services
- Capital goods
- Land
In
the “long run”, all of these factors of production can be adjusted by
management. The “short run”, however, is defined as a period in which at least
one of the factors of production is fixed.
A
fixed factor of production is one whose quantity cannot readily be changed.
Examples include major pieces of equipment, suitable factory space, and key
managerial personnel.
A
variable factor of production is one whose usage rate can be changed easily.
Examples include electrical power consumption, transportation services, and
most raw material inputs. In the short run, a firm’s “scale of operations”
determines the maximum number of outputs that can be produced. In the long run,
there are no scale limitations.
Producer
community
The
incomes are generated for those participating in production, i.e., the labour
force, society and owners. These stakeholders are referred to here as producer
communities or, in shorter form, as producers. The producer communities have a
common interest in maximizing their incomes. These parties that contribute to
production receive increased incomes from the growing and developing
production.
The
well-being gained through commodities stems from the price-quality relations of
the commodities. Due to competition and development in the market, the
price-quality relations of commodities tend to improve over time. Typically the
quality of a commodity goes up and the price goes down over time. This
development favourably affects the production functions of customers. Customers
get more for less. Consumer customers get more satisfaction at less cost. This
type of well-being generation can only partially be calculated from the
production data. The situation is presented in this study. The producer
community (labour force, society, and owners) earns income as compensation for
the inputs they have delivered to the production. When the production grows and
becomes more efficient, the income tends to increase. In production this brings
about an increased ability to pay salaries, taxes and profits. The growth of
production and improved productivity generate additional income for the
producing community. Similarly the high income level achieved in the community
is a result of the high volume of production and its good performance. This
type of well-being generation – as mentioned earlier - can be reliably
calculated from the production data.
Objective functions
An
efficient way to improve the understanding of production performance is to
formulate different objective functions according to the objectives of the
different interest groups. Formulating the objective function
necessitates defining the variable to be maximized (or minimized). After that
other variables are considered as constraints. The most familiar objective
function is profit maximization which is also included in this case. Profit maximization
is an objective function that stems from the owner’s interest and all other
variables are constraints in relation to maximizing of profits.
The procedure for formulating objective functions
The
procedure for formulating different objective functions, in terms of the
production model, is introduced next. In the income formation from production
the following objective functions can be identified:
- Maximizing the real income
- Maximizing the producer income
- Maximizing the owner income.
These
cases are illustrated using the numbers from the basic example. The following
symbols are used in the presentation: The equal sign (=) signifies the starting
point of the computation or the result of computing and the plus or minus sign
(+ / -) signifies a variable that is to be added or subtracted from the
function. A producer means here the producer community, i.e. labour force,
society and owners.
Objective
function formulations can be expressed in a single calculation which concisely
illustrates the logic of the income generation, the income distribution and the
variables to be maximized.
The
calculation resembles an income
statement starting with the income generation
and ending with the income distribution. The income generation and the
distribution are always in balance so that their amounts are equal. In this
case it is 58.12 units. The income which has been generated in the real process
is distributed to the stakeholders during the same period. There are three
variables which can be maximized. They are the real income, the producer income
and the owner income. Producer income and owner income are practical quantities
because they are addable quantities and they can be computed quite easily. Real
income is normally not an addable quantity and in many cases it is difficult to
calculate.
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