Production (economics)

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Production is the process of combining various inputs, both material (such as metal, wood, glass, or plastics) and immaterial (such as plans, or knowledge) in order to create output. Ideally this output will be a good or service which has value and contributes to the utility of individuals.^[1] The area of economics that focuses on production is called production theory, and it is closely related to the consumption(or consumer) theory of economics.^[2]

The production process and output directly result from productively utilising the original inputs (or factors of production).^[3] Known as primary producer goods or services, land, labour, and capital are deemed the three fundamental factors of production. These primary inputs are not significantly altered in the output process, nor do they become a whole component in the product. Under classical economics, materials and energy are categorised as secondary factors as they are byproducts of land, labour and capital.^[4] Delving further, primary factors encompass all of the resourcing involved, such as land, which includes the natural resources above and below the soil. However, there is a difference between human capital and labour.^[5] In addition to the common factors of production, in different economic schools of thought, entrepreneurship and technology are sometimes considered evolved factors in production.^[6][7] It is common practice that several forms of controllable inputs are used to achieve the output of a product. The production function assesses the relationship between the inputs and the quantity of output.^[8]

Economic welfare is created in a production process, meaning all economic activities that aim directly or indirectly to satisfy human wants and needs.^[3] The degree to which the needs are satisfied is often accepted as a measure of economic welfare. In production there are two features which explain increasing economic welfare. The first is improving quality-price-ratio of goods and services and increasing incomes from growing and more efficient market production, and the second is total production which help in increasing GDP. The most important forms of production are:

• market production
• public production
• household production

In order to understand the origin of economic well-being, we must understand these three production processes. All of them produce commodities which have value and contribute to the well-being of individuals.

The satisfaction of needs originates from the use of the commodities which are produced. The need satisfaction increases when the quality-price-ratio of the commodities improves and more satisfaction is achieved at less cost. Improving the quality-price-ratio of commodities is to a producer an essential way to improve the competitiveness of products but this kind of gains distributed to customers cannot be measured with production data. Improving product competitiveness often means lower prices and to the producer lower producer income, to be compensated with higher sales volume.

Economic well-being also increases due to income gains from increasing production. Market production is the only production form that creates and distributes incomes to stakeholders. Public production and household production are financed by the incomes generated in market production. Thus market production has a double role: creating well-being and producing goods and services and income creation. Because of this double role, market production is the “primus motor” of economic well-being.^[9]