Production

There are several ways to define production. One definition is that it is any activity that creates present or future utility. Production may be described as the amount of output (goods and services) produced per unit of input (land, labor, capital).

The production function transforms inputs like land, labour, capital and management into output. We get more output from a given combination of outputs today than we would have got in the past.

There are three principle means of increasing production. They are:

1. specialization and the division of labour;

2. investment in capital goods;

3. investment in human capital. ALL three of these means often involve a process of technological change that leads to more efficient production techniques and the creation of more goods and services.

Specialization occurs when an economic unit produces a narrower range of goods and services than it consumes. People concentrate their efforts on a particular set of tasks - it permits each person and country to use to best advantage any peculiar skills and resources. Specialization can be practiced by individuals, business firms, cities, regions, or countries. Regions or countries, for example, normally specialize in the production of those goods and services that are best fitted to produce, given their particular endowment of productive resources. Then they sell most of what they produce to people living elsewhere, and buy whatever else they need from other regions. What they buy may include the raw materials needed to produce the goods and services in which they specialize. Specialization is the basis of trade and exchange among individuals, businesses, cities, regions, and countries. Within the USA, for example, consumers in its various regions buy and use products originating in other regions - Idaho potatoes, Florida orange juice, Iowa corn, California vegetables plus products originating abroad such as coffee, bananas, tea, clothing and cameras. Industries do the same for the raw materials, components and certain finished products they need.

The concept of division of labour is closely related to specialization, but usually refers to the process whereby workers perform only a single or a very few steps of a major production task, as when working on an assembly line. As applied to labour, the concept of specialization usually refers to a person's occupation and the special training it requires, e.g. carpenter, electrician, eye surgeon.

On the one hand, specialization in all of its forms and the division of labour usually increase production. On the other hand, they also reduce self-sufficiency and increase economic interdependence, thereby creating a greater need for the exchange of goods and services.

What determines which goods we produce? Economists emphasize the law of comparative advantage. This law states that individuals or nations should specialize in producing or selling those commodities which they can produce at a relatively low cost. Similarly, an individual or nation should buy rather than produce those goods which they could produce only at a relatively high cost. The surprising feature of the law of comparative advantage is that even people or countries that are absolutely more inefficient than others will find it beneficial to specialize in the production of some goods. Thus, even the low productivity countries of Asia or Africa can find a niche for their products in the international marketplace because they are relatively efficient at producing some goods.