07/01/2026
Meaning of Production
Production has diverse meanings, but the usage depends on the context in which it is used.
Production in economics can be defined as the various economic activities aimed at the creation of goods and services, and the distribution of these goods to the final consumers for the satisfaction of human wants. That is, production is the making available of goods and services to those who are willing and able to pay for them for the satisfaction of their wants.
Production can equally be defined as the creation of utility while utility is the ability of a commodity or service to satisfy human wants.
All goods and services produced must possess utility, which means that they must be capable of satisfying certain human wants. In effect, economics is not concerned with whether something is good or bad. Its interest is in whether that thing is desired by someone who is prepared to pay for it.
Production in economics is never complete until the goods and services produced get to the final consumers.
Types of Production
Production is basically divided into two – direct and indirect production.
1. Direct Production: This is the creation of goods and services to satisfy household requirements. It is a small-scale production to meet family needs.
2. Indirect Production: It is a production by specialization for exchange. That is, the producer is not attempting to satisfy his own wants directly except to a very limited extent.
A good is anything offered for sale, acceptance, and acquisition.
Types of Goods
There are two basic types of
1. Consumer Goods: These are goods that have reached their consumable stage, that is, they are ready for use by the final consumers without undergoing further process of production. Consumable goods can be durable or non-durable.
Durable goods have a life span usually more than one year and can be used over and over again. Examples are shoes, chairs, computers, radios, etc.
Non-durable goods are perishable goods that are consumed almost immediately due to their precarious nature. Examples are yam, bread, garri, tomatoes, banana, etc.
2. Producer/Capital Goods: These are goods which can be used to produce other goods and services. They include vehicles, factory buildings, sewing machines, etc.
Other types of goods include:
Economic goods: These are goods that are useful or valuable and at the same time, scarce in their available quantity. They command a price as people are prepared to pay to possess them. They can be utilized and priced according to value and volume.
Non-economic goods/free goods: These goods are very useful to human existence and survival. They are not scarce, therefore, they cannot normally command a price. They are freely available in any quantity desirable to man since they are freely gotten from nature. Examples include air, rain, water and sunshine.
Classification of Production
Primary Production: This is the first stage of production which is concerned with the extraction of raw materials from land, air and sea. It includes farming, mining, quarrying, oil drilling, crude oil, etc.
Secondary Production: This is the processing, transformation and conversion of raw materials into finished goods. At this stage of production, utility is added to the basic raw materials from primary production. Those in the manufacturing and construction industries are managed are involved in secondary production.
Tertiary Production: This is the last stage of production which is concerned with commercial activities and rendering of both direct and indirect services. It is mainly concerned with the distribution of goods and rendering of services (direct and indirect services) to the final consumers. Examples are wholesalers, barbers, hairdressers, teachers, musicians, retailers, bakers, etc.
Concepts of Production
1. Production Function: This is the technical relationship between production factor inputs and outputs. It shows the maximum quantity of output (q) that can be obtained from the quantities of inputs (Labour & Capital) used in the production process. ∴ q = f (L, k) where q = output, L = labour, k = capital.
2. Short Run Production Concept: The short-run production period is one in which there is at least one fixed factor while others are variable factors.
Total Product: This is the total amount of the commodity that can be produced using a fixed amount of factor inputs at a given period average.
Product: This is the output per unit of input.
Marginal Product: This is the extra unit of output produced resulting from using an additional unit of variable factor input.
Law of Diminishing Returns: This is otherwise known as the “Law of Variable Proportions”. The law of diminishing returns states that “As more and more units of a variable factor are used with a given quantity of fixed factors, the average and the marginal product of the variable factor will eventually fall.
3. Long-Run Production Concept: The long-run production period is a period in which all the factor inputs have been varied with the level of production.
Least Cost Combination of Factors: A least-cost combination of inputs is a combination of inputs that will enable the firm to produce a given level of output at the minimum possible costs.
Isoquant: An isoquant is the locus of all the technologically efficient methods (a combination of any two inputs) for producing the same level of output.
Features of an Isoquant
a. It must be negatively sloped in the relevant stage.
b. It is convex to its origin.
c. An Isoquant cannot intersect or be tangent to each other.
d. It shows cardinal magnitudes which are quantifiable
Return to Scale: This concept shows a responsive level of output to changes in the quantity of inputs used in a given production process. It can be classified into;
a. Increasing Return to Scale: This occurs when a proportionate change in input leads to a greater proportionate change in output with a fall in the cost per unit of output.
b. Constant Return to Scale: This occurs when a proportionate change in input brings about an equal proportionate change in output such that the unit cost of output is unchanged.
c. Decreasing Return to Scale: This occurs when a proportionate change in input results in less than proportionate change in output while the unit cost of output increases.
Scale of Production
The scale of Production can be defined as growth as a result of the expansion of the volume of productive capacity resulting in the increase in output and a decrease in the cost of production per unit of output.
Types of Scale of Production
Internal Economies and Internal Diseconomies: It helps the firm in reducing the marginal cost or average cost per unit. It can bring maximum productivity and efficiency.
External Economies and External Diseconomies: This happens within the industry. It reduces the average cost of the company. Since, cost per unit totally depends on the size of the industry, the average cost decreases as industry size increases.
Factors that Determine Scale of Production
Availability of capital
Level of technology
Level of experience
Level of demand or size of the market
Nature of commodity
Government policy
Keep following the Clinton Economics Platform for more economical discussions.
