Production is the process of making or manufacturing goods and products from raw materials or components. In other words, production takes inputs and uses them to create an output which is fit for consumption – a good or product which has value to an end-user or customer.
What Does Production Mean?
Okay, so we know that production is the process of making products from raw materials, but production also has economic value because it is creating an output which has a value and will satisfy human wants and needs.
Put simply, production creates products which humans want and are willing to pay for, which boosts the economy and allows manufacturers to continue producing more and more outputs.
In economics, a business which produces goods are known as “producers” and these companies are taking the inputs available to them (both material and immaterial) to produce products which the consumer will want to buy.
Inputs don’t have to be raw materials either. An input can also be immaterial or intangible, for example, manufacturing plans or technical and industry know-how.
It’s becoming common for the manufacturing processes associated with production to be outsourced by companies as a way to reduce their costs. In these companies, they pay a third-party company a fee to take on the production of the products and can instead focus on the design, marketing, and selling of the product.
An example of this would include a clothing company who outsources to an online production company and then focuses on distributing their product rather than taking on the manufacturing of the clothes.
Apple is a good example of immaterial input production because they take great care in brainstorming new ideas and designs for their products (mostly based out of California).
They hire the best designs and creative minds in the world to create the blueprints for their products, but the actual production of the physical devices is outsourced to huge electronics manufacturing companies in China.
Let’s say you run a small t-shirt company out of your bedroom. In order to produce your product to sell to customers, you would need to invest in an expensive printing machine.
If that machine costs $1,000 to purchase and you sell your t-shirts for $20 each, you would need to sell 50 shirts before you break even on the cost of the machine (and this doesn’t factor in the cost for ink).
Alternatively, you could outsource the production of these t-shirts to a local or online printer who already have a machine. They might charge you $5 per shirt created, and if you sold 50 shirts, you’d have $750 profit.
Jess’s Bakery sells blueberry muffins. Since they only have one product, it makes sense for them to produce these in batches of 100 at a time.
Batch producing the muffins makes it cheaper for Jess to produce, and allows her to make more profit from selling them.
Toyota make a lot of cars each year, and all of those cars need seats. Mass production allows them to produce the car seats in a continuous way by using a “production line”.
The seat moves down the line to various stations where workers will produce the seat. This can include adding the upholstery, installing the seatbelts, testing the seatbelts, fitting the headrests and so on.
This type of production is for goods and services that are consumed by members of a household. For example, a mother who bakes bread in the morning to make sandwiches for the kids.
There are many examples of production across different sectors where something of value is being created for consumers.
As mentioned previously, production and the level to which the goods satisfy the consumer’s needs is a good measure of economic well-being.
The improving price to quality ratio and an increase in income from a growing and efficient production market helps to increase the GDP1.
When the quality to price ratio of the product increases, it also improves the competitiveness of the product because other manufacturers will have to increase their quality to price ratio as well.
Often this means that products have to lower the price and take a loss in profit, but the increases competitiveness in the market leads to a growth in sales volume, which ultimately increases the well-being of the economy.
The specific area of economics which focuses on production is called production theory, and this is used by economics to explain the principles by which a business decides how much of it’s commodity (or outputs/products) it will produce.
Gross Domestic Product is the total market value of all goods and services in a country at a specific time.↩