Production Theory and Production Function in Economics

In carrying out production activities, various factors of production are needed to support the ongoing production activities. Production factors that are generally needed are natural factors of production, labor, capital and skills or abilities .

In a production process, these four factors are absolute. Without these factors of production, production activities cannot run. These four factors of production support each other as inputs, which in turn can produce products or outputs.

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Production Function

Between the factors of production (input) and output (output) there is a technical relationship called the production function. The production function is a formula that shows the amount of production goods which depends on the number of factors of production used.

In other words, this production function shows that there is a relationship between input and output that can be produced from a combination of these inputs. From this understanding, the production factor formula can be obtained. The production factor formula is:

Q = f (R, L, C, T)

Information :

Q = Quantity / number of goods produced

f = function / symbol equation

R = Resources / natural wealth

L = Labor / labor

C = Capital / capital

T = Technology / Technology

This formula can be translated in an example of bag production. The bag production process can be done in various ways, but still with the same input combination. If the input combination is changed, the results automatically will also change.

It is different if the input combination is changed and replaced with another input combination. If so, the output can remain the same. For example, the addition of labor and decline in machinery or other things.

For clarity, can be seen in the following input combination table. Here is a table to produce 100 units of bags.

Combination The output Machine Labor
A 100 6 3
B 100 10 4
C 100 4 6
D 100 3 10

From the equation of the production function above, it can be seen that basically, the level of production of an item depends on the amount of capital, labor, natural wealth and the technology used.

For different amounts of production, of course also requires different factors of production as well. However, there are also unequal amounts of production produced by factors of production that are considered constant. The fixed factors are machinery, equipment and company buildings. While the factors of production that change are workers.

To determine the most economical combination of factors of production, it is necessary to compare various combinations of factors of production to produce a certain number of goods.

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Production Theory

In this production activity, there is also a theory of production. The most widely known production theory is the “Additional Law with Less and Less Results” or the Law of Diminishing Return.

This production theory was put forward by David Ricardo who was written in his book entitled ” Principle of Political Economic and Taxation “. In the Supplementary Law of Increasingly Reduced Results, the basic nature of the relationship between production levels and labor used is explained to realize this production.

The Theory of Production Law of More and More Reductions states that “If the production factor that can be changed in number (labor) is continuously added by as much as one unit, in the beginning the total production will increase in number. But after reaching a certain level, additional production will decrease and eventually reach a negative value. ”

In this production theory, David Ricardo states that when we continuously add one of the input units in the same amount, while the other inputs remain constant, at first there will be an increase in output that is more than proportional ( increasing returns ). However, at some point, the results we get will actually be reduced ( diminishing returns ).

For example, in an expansion of agricultural production, it can be done by adding factors of labor production to work on a piece of land. That way, the results obtained will increase.

This increase in yield will continue until it reaches the most appropriate combination of production factors, ie when the highest additional yield is obtained. If this has been achieved, then the addition of labor will actually result in the addition of the results so that it decreases or even gives no results at all and eventually becomes negative.

More details, can be seen in the following table.

Table theory of production with the addition of one factor

Input 1

 

(soil)

Input 2

 

(labor)

The output

 

(total products)

More Results

 

(marginal product)

Permanent 0 0 0
Permanent 1 6 6
Permanent 2 14 8
Permanent 3 24 10
Permanent 4 36 12
Permanent 5 45 9
Permanent 6 50 5
Permanent 7 53 3
Permanent 8 53 0
Permanent 9 48 5

From the figures shown in the table above, it can be seen that the amount of output ( total product ) has indeed increased as a result of an increase in the number of workers. However, the excess yield ( marginal product ) is not always comparable.

The application of the law of diminishing returns needs to be understood with several assumptions, namely:

  • One factor of production, for example land in agriculture or machinery in industry, must be fixed so that only the ratio changes.
  • Production techniques are specified in a fixed production process. If the level of production techniques applied is more sophisticated, it can enhance the productivity of each workforce, and that means the law does not apply.
  • The working power ( productivity) of the changed production factor must be comparable (the same). If the changed factor of production is the number of workers, the level of knowledge and skills of the workforce must be the same as the intended work.

 

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