Production economics: Objectives, importance and Activities

Objectives

1. To determine and outline the conditions that give the optimum use of capital, labour, land and management resources in the production of crops, livestock and allied enterprises.
2. To determine the extent to which the existing use of resources deviates from the optimum use.
3. To analyse the forces which condition the existing production pattern and resource use.
4. To explain the means and methods in getting from the existing use to optimum use of resources.

Importance

The concept of the factor of production is of great importance in modern economic analysis. It is used in the theory of production in which the various combinations of factors of production help in producing output when a firm operates under increasing or decreasing costs in the short-run, and when the returns to scale increase or decrease in the long-run.

Further, we can also know, how can the least-cost combination of factors are obtained by a firm?

The theory of cost of production also depends upon the combinations of factors employed in business and the prices that are paid to them. From the point of view of the theory of costs of production, factors of production are divided as fixed factors and variable factors. Fixed factors are those whose costs do not change with the change in output, such as machinery, tube well, etc.

Variable factors are those whose quantities and costs change with the change in output. Larger outputs require larger quantities of labour, raw materials, power, etc.

So long as a firm covers the costs of production of the variable factors it employs, it will continue to produce even if it fails to cover the costs of production of the hired factors, and incurs a loss. But this is only possible in the short-run.

In the long-run, it must cover the costs of production of both the fixed and variable factors. Thus the distinction between fixed and variable factors is of much importance for the theory of firm.

Factors of production are also divided into divisible and indivisible factors. Factors are divisible when their inputs can be adjusted to the output. Labour is said to be divisible when the number of labourers may be reduced in keeping with the output of the firm. Divisible factors lead to the economies of scale for a firm by adjusting the number of factors to the output of the firm.

Indivisible factors are those which are available in minimum sizes, and are lumpy, such as machines, entrepreneur, etc. They also lead to economies of scale, but at a faster pace. When a firm expands, the returns to scale increase because the indivisible factors are employed to their maximum capacity. More output can be had by using the existing machines up to their full productive capacity.

Lastly, the concept of factor of production is used in explaining the theory of factor-pricing. For this purpose, factors of production are divided into specific and non-specific. A factor of production which is specific in use earns a higher reward than a non-specific factor. This also solves the problem of distribution of income to the various resource-owners.

Activities

Economic activities can be grouped into three categories, viz., production, exchange and consumption !

Economic Geography focuses on the distribution of production, distribution and consumption activities. The economic geographer wishes to display the spatial distribution of these economic activities and to understand why they are located as they are.

A significant part of this understanding lies in recognizing how economic activities are interrelated in particular areas and how the activities are tied to other economic activities at other locations.

Economic activities still form the core of economic geography, whatever may be the approach of study. Economic activities can be grouped into three categories, viz., production, exchange and consumption.

1. Production:

1. Primary production includes age-old activities of production which are directly and indirectly taken from the earth such as hunting animals and gathering wild products; extracting minerals from the earth’s crust; fishing from rivers, lakes and oceans; and growing trees. In general, five primary activities recognised are: agriculture, cattle grazing, forest production, hunting and fishing, and mining and quarrying.
2. Secondary production increases the value or usefulness of a previously existing item by changing its form. Such activities include manufacturing and commercial agriculture.
3. Tertiary production involves the service sector rather than the tangible goods. In tertiary production no particular article is directly related, various kinds of aids are rather used for transport, distribution and primary and secondary production.
4. Quaternary services represent special type of services such as financial, health, education, information, data processing, etc.
5. Quinary activities include high -level managerial and executive administrative services both public and private. Research scientists, legal authorities, financial advisers and professional consultants are included in this category.

2. Exchange:

Exchange services are essential for goods produced. It is through exchange that a product reaches to its consumer. The following services are included in exchange activities:

(i) Transportation and distribution services.

(ii) Exchanging services and ideas by telecommunication or face-to-face contact.

(iii) Satisfying the needs of people by changing their location (passenger trans­portation) .

(iv) Warehousing and distribution.

(v) Wholesale trade marketing activities.

(vi) Retail trade marketing activities.

These exchanges increase the value of an item because of services provided and also play an important role in modern economies.

3. Consumption:

A third aspect of all the economic activity involves the consumption of goods and services. The term ‘consumption’ refers to the final or direct use of goods and services to satisfy the wants and needs of human beings. This aspect, i.e., geography of consumption has largely been ignored by geography. But now, there is a growing interest among geographers to study spatial aspects of consumer behaviour.

The above mentioned activities are having functional interrelationship at various stages of economic production. This functional interrelationship is related to secondary and tertiary production through various services. The direct or indirect functional relation of all the resources of production depends upon location, relief, climate, soil and technical know-how of those areas.

Just as the various aspects of primary production have established functional interrela­tionship with one another, in the same way, all the factors of secondary production have established functional relation with the factors of primary production.

In the same way tertiary production has functional relation with the primary and secondary production. This functional interrelationship of production not only changes the form and utility of material but also effects a transformation in their ownership and value.