Comprehensive Summary on Production Theory and Factors of Production

Romeo J. Bordallo Jr.

Graduate School, Foundation University

MBA01, Microeconomic Analysis

Dr. Maria Corazon E. Mercado, DBA

 In traditional economics, the term ‘production’ is used in a broad sense. It refers to the

provision of goods and services for sale in the market with a view to satisfying human needs

and wants.

However, the term is used in a narrow sense to refer to the processes of physical

transformation of resources, such as transformation of iron ore into steel or an airplane is

created by assembling thousands of parts, which are raw materials inputs. In services, a tax

preparation service combines all the knowledge of the tax preparer with the client’s

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The production system can be seen as consisting of three elements – inputs, the

production process and outputs. In reality, the outputs are the starting point of operation in as

much as they must be considered in the light of the market possibilities.

Factors of production is an economic concept that refers to the inputs needed to

produce goods and services. The factors are land, labor, capital, and entrepreneurship.

In factors of production, the word “production” refers to a process of transforming

inputs into outputs, which are finished products that can be sold as a good or service. In order

to do so, the input will go through a production process and various stages to reach the hands

of consumers.

Inputs take the form of labor of all types, the required raw materials and sources of

energy. All these involve cost outlays. Thus the theory of cost and theory of production are

interrelated. In fact, the former is derived from the latter.

In the short run, it is assumed that some factors ( such as capital or plant size) remain

fixed and others are variable. In the long run, it is assumed that all factors are variable. From

this we drive the proposition that the short run cost are partly fixed and partly variable; in the

long run all cost are variable.