•“The organized process of transformation
of raw materials into final products using
men and machines is termed as
•Production transforms tangible or
intangible input into goods or services.
•Production depends on the following
• Land does not only refer to soil, it includes
other facilities of natural resources. Using
land for industrial purposes allows nations
to improve the production processes for
turning natural resources into consumer
• Land is not freely available and hence
investment has to be done for acquiring it.
• Land lacks mobility and so selection of land
is a crucial factor.
• Labor represents the human capital
available to transform raw material into
• Human capital includes all individuals who
are capable of working in the economy and
providing various services to other
individuals or businesses.
• It is a flexible resource as workers can be
allocated to different areas of the economy
• Capital represents the major physical assets
individuals and companies use while
producing goods or services. These assets
include buildings, production facilities, etc.
• Capital also represents the monetary
resources companies use to purchase natural
resources, land and other capital goods.
• Entrepreneurship is considered as an
important factor because economic
resources are not directly transformed into
• Entrepreneurs have an idea for creating a
valuable good and assume the risk involved
with transforming economic resources into
Laws Of Production
1.Law Of Variable Proportions:-
• This law deals with the concept of increasing
productivity using change in production units
within limits of existing fixed cost.
• “In a given state of technology, when the
units of variable factor are increased within
the units of other fixed factors, the marginal
productivity increases at increasing rate up
to certain point, then after this point it will
Graph Of Variable Proportions
Stage 1: Average and
total product rising.
Stage 2: Average
product declining, but
Stage 3: Marginal
product is negative,
total product is
2.Law Of Returns To Scale
• Following are three laws of returns to
a) Law Of Increasing Returns
b) Law Of Constant Returns
c) Law Of Diminishing Returns
a)Law Of Increasing Returns:-
• “As the proportion of one factor in a
combination of factors is increased, up to a
point, the marginal product of the factor
• Law of increasing returns to scale operates
up to the optimum point i.e., the point of
maximum return. As a business expands and
moves towards the optimum, the return per
unit goes on increasing, i.e., the cost of
production is falling.
b) Law Of Constant Returns:-
• If output increases by that same proportional
change as all inputs change then it is called
constant returns to scale.
• The law of constant returns operates when
the return remains the same as the business
is expanded or contracted.
• Whatever the scale of production is, the cost
of the product per unit remains the same.
c) Law Of Diminishing Returns:-
• If output increases by less than the
proportional change in inputs, there
are decreasing returns to scale.
• It means that the increase in various factors
won’t decrease cost of production.
• Diminishing returns to scale occurs if a
proportional increase in all inputs results in a
less than proportional increase in
• In the given schedule, units of variable factor
are employed with other fixed factors of
• The marginal productivity of labor goes on
increasing up to the 3rd worker. This so
because the proportion of workers to other
fixed factors was at first insufficient.
• After 3rd worker marginal productivity goes on
falling onwards till it drops down to zero at 6th
unit of labor.
• The 7th worker is only a cause of obstruction
to the others and is responsible in making the
marginal productivity negative.