Chapter - 3
Theory of Production and Cost
Unit - 1 Theory of Production
Meaning of Production
Generally, production refers to the process of converting inputs into output.
According to James Bates and J.R. Parkinson “Production is the organized activity of transforming
resources into finished products in the form of goods and services; and the objective of production is to
satisfy the demand of such transformed resources”.
Production does not include
Work done within household by anyone out of love and affection
Example : Food Cooked by Mom is not production
Production confer following types of utilities
Confer Give
(1) Place utility Apple from Kashmir
(2) Time utility Safal Matar
(3) Form utility (Input Output)
(4) Personal utility Services of CA
Factors of Production
(1) Land
(2) Labour
(3) Capital
(4) Entrepreneur
Land includes
(1) Natural resources
(2) Soil
(3) Water
(4) Air
Characteristics of Land
(i) Land is a free gift of nature:
(ii) Land is permanent and has indestructible power:
(iii) Land is a passive factor:
(iv) Land is immobile:
(v) Land has multiple uses:
(vi) Land is heterogeneous:
1 Theory of Production & Cost
, NOTE - Supply of Land is perfectly inelastic form overall economy’s point of view
Land is relatively elastic from the point of view of a firm.
Characteristics of labour
(1) Human Effort:
(2) Labour is perishable:
(3) Labour is an active factor:
(4) Labour is inseparable from the labour:
(5) Labour power differs from labourer to labourer:
(6) All labour may not be productive:
(7) Labour has poor bargaining power:
(8) Labour is mobile:
Note : Labour supply curve is backward bending
Capital
Capital is a part of the wealth of individuals or communities that is used for the purpose of producing
more wealth.
Capital is a stock concept, representing accumulated resources, while income generated from capital is a
flow concept.
Types of Capital:
a) Fixed capital is that which exists in a durable shape and renders a series of services over a period of
time. For example tools, machines, etc.
b) Circulating capital is another form of capital which performs its function in production in a single use
and is not available for further use. For example, seeds, fuel, raw materials, etc.
c) Real capital refers to physical goods such as building, plant, machines, etc.
d) Human capital refers to human skill and ability. This is called human capital because a good deal of
investment goes into creation of these abilities in humans.
e) Tangible capital can be perceived by senses whereas intangible capital is in the form of certain rights
and benefits which cannot be perceived by senses. For example, copyrights, goodwill, patent rights, etc.
f) Individual capital is personal property owned by an individual or a group of individuals.
g) Social Capital is what belongs to the society as a whole in the form of roads, bridges, etc.
Capital Formation
Capital formation refers to the process of increasing the stock of real capital in a country.
It involves the production of capital goods such as machines, tools, factories, transportation equipment,
and electricity, which are used for further production of goods.
Capital formation is also known as investment.
Stages of capital formation :
There are mainly three stages of capital formation which are as follows:
a) Savings
b) Mobilization of Savings
c) Investment:
2 Theory of Production & Cost
Theory of Production and Cost
Unit - 1 Theory of Production
Meaning of Production
Generally, production refers to the process of converting inputs into output.
According to James Bates and J.R. Parkinson “Production is the organized activity of transforming
resources into finished products in the form of goods and services; and the objective of production is to
satisfy the demand of such transformed resources”.
Production does not include
Work done within household by anyone out of love and affection
Example : Food Cooked by Mom is not production
Production confer following types of utilities
Confer Give
(1) Place utility Apple from Kashmir
(2) Time utility Safal Matar
(3) Form utility (Input Output)
(4) Personal utility Services of CA
Factors of Production
(1) Land
(2) Labour
(3) Capital
(4) Entrepreneur
Land includes
(1) Natural resources
(2) Soil
(3) Water
(4) Air
Characteristics of Land
(i) Land is a free gift of nature:
(ii) Land is permanent and has indestructible power:
(iii) Land is a passive factor:
(iv) Land is immobile:
(v) Land has multiple uses:
(vi) Land is heterogeneous:
1 Theory of Production & Cost
, NOTE - Supply of Land is perfectly inelastic form overall economy’s point of view
Land is relatively elastic from the point of view of a firm.
Characteristics of labour
(1) Human Effort:
(2) Labour is perishable:
(3) Labour is an active factor:
(4) Labour is inseparable from the labour:
(5) Labour power differs from labourer to labourer:
(6) All labour may not be productive:
(7) Labour has poor bargaining power:
(8) Labour is mobile:
Note : Labour supply curve is backward bending
Capital
Capital is a part of the wealth of individuals or communities that is used for the purpose of producing
more wealth.
Capital is a stock concept, representing accumulated resources, while income generated from capital is a
flow concept.
Types of Capital:
a) Fixed capital is that which exists in a durable shape and renders a series of services over a period of
time. For example tools, machines, etc.
b) Circulating capital is another form of capital which performs its function in production in a single use
and is not available for further use. For example, seeds, fuel, raw materials, etc.
c) Real capital refers to physical goods such as building, plant, machines, etc.
d) Human capital refers to human skill and ability. This is called human capital because a good deal of
investment goes into creation of these abilities in humans.
e) Tangible capital can be perceived by senses whereas intangible capital is in the form of certain rights
and benefits which cannot be perceived by senses. For example, copyrights, goodwill, patent rights, etc.
f) Individual capital is personal property owned by an individual or a group of individuals.
g) Social Capital is what belongs to the society as a whole in the form of roads, bridges, etc.
Capital Formation
Capital formation refers to the process of increasing the stock of real capital in a country.
It involves the production of capital goods such as machines, tools, factories, transportation equipment,
and electricity, which are used for further production of goods.
Capital formation is also known as investment.
Stages of capital formation :
There are mainly three stages of capital formation which are as follows:
a) Savings
b) Mobilization of Savings
c) Investment:
2 Theory of Production & Cost
