production, theory of

Analysis concerned with transforming factor inputs into outputs according to a production function.

Production is dependent on technology, the mix of factor inputs, factor prices and marginal productivity.

The Modern Cambridge School envisages an economic model which encompasses sociological, historical and psychological factors as well as pure economic ones. It attacks neo-classical economics for its use of the aggregate production function particularly in growth theory.

Also see: neo-classical growth theory, cambridge capital controversies, cobb-douglas production function, roundabout method of production

Production is a process of combining various material inputs and immaterial inputs (plans, know-how) in order to make something for consumption (output). It is the act of creating an output, a good or service which has value and contributes to the utility of individuals.^[1] The area of economics that focuses on production is referred to as production theory, which in many respects is similar to the consumption (or consumer) theory in economics.^[2]

Economic well-being is created in a production process, meaning all economic activities that aim directly or indirectly to satisfy human wants and needs. The degree to which the needs are satisfied is often accepted as a measure of economic well-being. In production there are two features which explain increasing economic well-being. They are improving quality-price-ratio of goods and services and increasing incomes from growing and more efficient market production or total production which help in increasing GDP. The most important forms of production are:

• market production
• public production
• household production

In order to understand the origin of economic well-being, we must understand these three production processes. All of them produce commodities which have value and contribute to well-being of individuals.

The satisfaction of needs originates from the use of the commodities which are produced. The need satisfaction increases when the quality-price-ratio of the commodities improves and more satisfaction is achieved at less cost. Improving the quality-price-ratio of commodities is to a producer an essential way to improve the competitiveness of products but this kind of gains distributed to customers cannot be measured with production data. Improving the competitiveness of products means often to the producer lower product prices and therefore losses in incomes which are to be compensated with the growth of sales volume.

Economic well-being also increases due to the growth of incomes that are gained from the growing and more efficient market production. Market production is the only production form that creates and distributes incomes to stakeholders. Public production and household production are financed by the incomes generated in market production. Thus market production has a double role in creating well-being, i.e. the role of producing goods and services and the role of creating income. Because of this double role market production is the “primus motor” of economic well-being and therefore here under review.