S.5 Economics Production Theory Caltec S.5

1 ©Depa rtment of Economics & Business Studies C AM 2020 TOPIC 3: PRODUCTION THEORY & MARKET STRUCTURES PRODUCTION THEORY Production theory is the study of production, or the economic process of converting inputs into outputs. Production uses resources to create a good or service that is suitable for use Production is a technical term which refers to the process of transforming resources into output of goods and services aimed at satisfying human wants It thus involves the creation of utility in goods and services aimed at satisfying the wants of individuals or groups of individuals It covers such areas as manufacturing, construction, provision of services, extractive industries etc Aim of production Production is a process that combines various material inputs and immaterial inputs (plans, know -how) to make something for consumption (the output). It is the act of creating output, a good or service that has value and contributes to the utility of individuals The aim or purpose of all production is the satisfaction of human wants. Man’s needs can be satisfied directly thro ugh production of goods or services for one’s consumption or indirectly through production of goods to satisfy other people’s wants for example production for the international market Production also aims at improving on main’s social and economic welfare and enabling man to earn a living. Economic well -being is created in a production process, meaning all economic activities that aim directly or indirectly to satisfy human needs. The degree to which the needs are satisfied is often accepted as a measure of economic well -being. In production two features explain increasing economic well -being. They are improving quality price ratio of commodities and increasing incomes from growing and more efficient market production NB: Utility is the ability of or usefu lness in a good or …