In order to satisfy wants, we have to produce various types of goods and services. The production of goods takes place in agricultural fields, factories, firms, industries and production of services takes place in shops, offices, hospitals, schools, colleges, hotels, banks and at many other places. In an economy, there may be lakhs of production units which produce goods and services.
Production is the result of the combined efforts of the four factors of production - land, labour, capital and entrepreneurship. These are also called inputs or resources. The relationship between inputs and output holds the key to optimum use of resources, producing maximum level of output possible and increasing the level of output.
Production is defined as transformation of inputs into output. The resources used in production are called inputs and the goods and services produced are called output. For example, for the production of an output called rice, we require inputs such as agricultural land, seeds, fertilizers, plough, water, pesticides, diesel to run tractor. All these inputs have to be combined in some prescribed amounts to produce some quantity of rice.
Production function tells the technical relationship between inputs and output of a firm. It tells the maximum quantity of output that can be produced with the help of given quantities of inputs.
In short, the quantity of output is the function of inputs like land, labour, capital, entrepreneurship and required raw materials. There is a direct relationship between the amount of inputs and the amount of output produced. An increase in inputs leads to increase in output to certain extent and vice versa. The aim of every producer is to maximise the quantity of output from the given amount of inputs. The inputs must be combined in a particular manner for production of a particular type of output.
For example, the tailoring shop requires a master who can cut the cloth as per measurement and one person for one stitching machine to stitch the cloth cut by the master to make shirt or pant. If work load is more then another machine and a person to work with it can be added.
Technology or method of production refers to the ratio in which inputs are combined to produce output. So, the production function is also defined as ‘a technological relationship that tells us the maximum output producible from various combinations of inputs.’