To satisfy one's own needs, a person must constantly engage in economic activity. Since it is not possible to take the necessary benefits from nature in sufficient quantities, they must be produced. Human needs are constantly growing, and this spurs the development of production. Based on this, the theory of production was formulated.
All factors of production are divided into large categories - capital, materials, labor, each of which is divided into narrower groups. For example, skilled labor, unskilled labor, entrepreneurial efforts of individuals. Materials are divided into steel, plastic, water, electricity, etc. Capital includes buildings, inventory, equipment. The interaction between production factors, the process and the output is expressed through the production function.
The theory of factors of production is classically based on three aggregated, generalized pillars - “land”, capital and labor, which are equivalent in value. The participation of each of them in economic activity is equally necessary.
Land is considered as a natural factor and the fundamental principle of any production. This term covers all the useful opportunities that nature has given to man (the earth itself, minerals, water , etc.). Labor production theory defines as human activity, abilities, due to education, experience, skills that are used to produce a useful product. Capital - the aggregate of the means of labor used in the production of goods (services). Today, entrepreneurial activity is considered as a separate factor of production, which brings together all other factors, ensuring their interaction with the help of personal initiative, knowledge, risk, ingenuity. This is a kind of human capital.
The theory of production considers only those methods of production that are effective. The rationality of the costs of various factors determines the maximum possible output, which clearly demonstrates the production function. It shows the volume of output Q, which can be produced under various combinations of factors.
The maximum output is understood as a cost-effective activity in which all factors included in it are used with the greatest possible return. Graphically, the production function is indicated by iso-quanta (lines showing costs at which the same output is possible). The isoquant method makes it possible to compare all options for combining various factors and choose the optimal one.
The theory of production also reflects the intensity of application in the production of resources with the help of the production function. For example, a capital-intensive or labor-saving mode of production means that in this situation more capital is used than labor (under the influence of technological progress). Conversely, a labor-intensive or capital-saving method shows that more labor is used. With the proportional use of these two resources, the method is called neutral.
Today, cost is an important category of economy . Production costs affect the size of profit, the possibility of expansion of production and much more. Therefore, the theory of production costs arose, according to which all costs are divided into the following types: social, individual, financial, absolute, additional, production, short-term and long-term. In the last decade, the theory of transaction costs is popular , in which the main attention is paid to the costs of implementation (advertising, marketing, market service, etc.). Costs are divided into those that depend on the volume of production, and those that do not depend on it. On this basis they are divided into constants and variables.