 Name: Syed

Nusrat Shah

 Roll no. : 3105

ASSIGNMENT  Semester : 1st

AGRICULTURE  Section : B

ECONOMICS-301  Subject : AE-301

 Submitted to : Sir.

Rizwan Waheed
Theory of Production
Production theory is the economic process
of producing outputs from the inputs.

Inputs Transformation Outputs

• Land • Economic • Goods

• Labor Process •Services
• Capital
• Entrepreneur

Production Definition
 Adam Smith
• Production is a creation of physical assets.
 Alfred Marshal
• Production is a creation of utilities.
 Philip Kotler
 • Production is a creation of bundle of
satisfaction.
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 distribution of the good or service
produced.

Factors of Production
1.Land
2.Labor
3.Capital
4.Entrepreneur
1. Land:
 Land is the economic resource encompassing natural
resources found within the economy.
 This resource includes timber, land, fisheries, farms and
other similar natural resources.
 Land is a limited resource for any economies.

2.Labor:
 Labor represents the human capital available to
transform raw materials or natural resources into
consumer goods.
 Human capital includes all individuals capable of
working in the economy and providing various services
to other individuals or businesses.
3.Capital:
Capital has two economic definitions as a factor of
production.
1. Capital can represent the financial resources
companies use to purchase natural resources, land
and other capital goods.
2. Capital also represents the major physical assets
individuals and companies use when producing goods
or services.
• These assets include buildings, production facilities,
equipment, vehicles and other similar items.
4. Entrepreneur:
 Entrepreneur is a person who sets up a business and
takes financial risks in the hope of profit.
 Entrepreneurs usually have an idea for creating a
valuable good or service.

Production Function:
 Production function relates physical output of a
production process to physical inputs.
 It is a mathematical function that relates output with
the number of inputs.
 Production function Q = F(K, L)
• Q = quantity of output, K = capital, and L = labor

Basic Concepts of Production Theory

INPUT
• An input is a good or service that goes into the
production process. As economists refer to it, an input
is simply anything which a firm buys for use in its
production process.

OUTPUT
• An output, on the other hand, is any good or service
that comes out of a production process.

FIXED AND VARIABLE INPUTS

Inputs are considered variable or fixed depending on
how readily their usage can be changed
• Fixed input
 – An input for which the level of usage cannot readily
be changed
- In economic sense, a fixed input is one whose supply is
inelastic in the short run.
- In technical sense, a fixed input is one that remains fixed
(or constant) for certain level of output.
• Variable input
• A variable input is one whose supply in the short
run is elastic, example, labour, raw materials, and
the like. Users of such inputs can employ a larger
quantity in the short run.
• Technically, a variable input is one that changes with
changes in output. In the long run, all inputs are
variable.
• Short run
– At least one input is fixed
– All changes in output achieved by changing usage
of variable inputs
• Long run
– All inputs are variable
– Output changed by varying usage of all inputs.