Production in Economics refers to the creation of those goods and services which have exchange value. It means the creation of utilities. These utilities are in the nature of form utility, time utility and place utility. Creation of such utilities results in the overall increase in the production and redistribution of goods and services in the economy. Utility of a commodity may increase due to several reasons.
If the physical form of a commodity is changed, its utility may increase. For instance, the utility of cotton increases, if it is converted into clothes. The other examples are processing of paddy into rice, wheat into flour and butter into ghee.
If a commodity is transported from one place to another, its utility may increase. For instance, if rice is transported from Tamil Nadu to Kerala, its utility will be more.
If the commodity is stored for future usage, its utility may increase. During rainy season, water is stored in reservoirs and it is used at a later time. This increases the utility of that stored water. Agricultural commodities like paddy, wheat, oilseeds, pulses are stored for the regular uses of consumers throughout the year.
Commodities in the transaction process, change from one person to another person. Commodities in the hands of producers have some utility and by the time they reach consumers through the traders their utility is increased. Such utility due to possession or transfer of ownership of the commodity is called, possession utility. For example, paddy in the hands of producers, i.e. farmers has less utility compared to that of the rice in the hands of consumers.
Human activity can be broken down into two components, production and consumption. When there is production, a process of transformation takes place. Inputs are converted into an output. The inputs are classified and referred to as land, labour, and capital. Collectively the inputs are called factors of production.
When the factors of production are combined in order to produce something, a fourth factor is required. Goods and services do not produce themselves but need some conscious thought process in order to plan and implement manufacture. This thought process is often called entrepreneurship or organisation.
Factors of production refer to those goods and services which help in the productive process.
Factors of production are broadly classified into primary factors and derived factors. Man (Labour) acts upon Nature (Land) to produce goods and services and wealth. These two factors (Land and Labour) are naturally given and without them no goods can be produced. These are called primary factors.
Capital and organisation are derived from the primary factors of production, and are called derived factors of production. These derived factors of production, when combined with the primary factors of production, raise total production.
According to the traditional classification, there are four factors of production. They are Land, Labour, Capital and Organisation.