Economics Dictionary: Production

Production is a business firm’s act of combining inputs (i.e. fertilizer, water, soil) to produce an economic output (crop yield). Total product is the total amount of output produced for any given level of input used. Marginal product is the additional output produced from using 1 more unit of input. A production process, or production function, describes how output varies as inputs used in production vary. Measures of productivity, such as units of input used per unit of output, help determine how well inputs are being used in a production process (i.e. they measure the efficiency of input use).

The Total Product graph, below, shows a production function. The graph shows that the quantity of output (Y) produced depends upon, or is a function of, the quantity of input (X) used. Total output continues to increase up to point X1, as more inputs are used. The graph shows how budgets, in this case an operating budget, are used to measure points on the total product curve. Operating budgets measure the combination of inputs (and input costs) needed to produce one particular level of outputs (and revenues).

Two types of inputs are used in production. The first, fixed factors of production, are inputs which can’t be changed during a production process to produce more output. Examples include land and machinery. The second, variable-rate factors of production, are inputs that can be changed during a production process to produce more output. Examples include water, nutrients and feed.

Fixed inputs cause the productivity of variable-rate inputs to decline. This is illustrated by the downward slope of the Marginal Product graph. The Marginal Product (output per unit input) curve measures how the amount of output produced changes from very small changes in input use. The graph shows that adding one more unit of input (i.e. acre foot of irrigation water) to a production process that includes some fixed factors of production (i.e. land) produces progressively less output (i.e. tons of wheat).

Examples

Agricultural crop production involved farmers managing inputs, such as seed and soil, to produce crop yields. This example is being tested for beta 0.8.7a

Flower farm located in Encinitas, California.

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