Production Theory: Definition, Types, Costs, and Anomalies

Production Theory Definition, Types, Costs, and Anomalies – The production process is one of the most important processes in a business process. Without a production process, consumers will not be able to take advantage of the value of the goods and/or services needed. In order for the production process in business to provide benefits and generate profits for the company, manufacturers need to know the theory of production. What is the theory of production and how can the theory of production benefit both producers and consumers?  let’s see the discussion below.

Understanding Production Theory

Production Theory Definition, Types, Costs, and Anomalies

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Food, drink, clothing, and everything you use to fulfill your daily needs is a product of production. In fact, anything that is not in the form of goods, services for example, is the result of production.

Thus, production is a series of processes that include all activities in order to create or add value from goods or services, either into semi-finished products or finished products. Production can be done by changing the shape of the material, moving the material to another place, or storing it.

The thing to note here is that there is added value. Examples of the process of adding value to goods are harvesting rice and processing it into rice, sewing cloth to make clothes, cooking food raw materials into finished food, processing coconut shells into bowls or charcoal, and so on. The examples above show the added value of a raw material so that it is ready to be consumed by consumers or processed again.

The production process requires a theory so that the production carried out by the company can run well so that the company that runs the business gets optimal profits, the quality and quantity of products are met, and consumers are satisfied. The theory can help the production process so that it runs as expected or at least close to expectations.

Production theory itself can be interpreted as a theory that explains the nature of the relationship between the desired production goals and the factors of production involved. In other words, production theory teaches a mechanism so that production can achieve the expected goals by maximizing the production factors owned by producers.

The main concept used in the theory of production is to produce the maximum possible output, both in terms of quality and quantity, with certain inputs. And produce a number of targeted outputs with minimal production costs. If these conditions are met, the company can print optimal profits.

Production theory uses scientific principles in carrying out the production process. These scientific principles include the selection of combinations so as to produce output with high productivity and efficiency as well as the selection of the right technology to achieve the desired output.

Production Theory by Product Type

Production theory also explains several types of production according to the output produced. Are as follows:

1. Extraction Production

Extraction production is a production activity that adds or creates use value by taking natural resources directly. These goods will later be sent to factories for reprocessing. Examples of extraction production include mining activities for gold, copper, coal, nickel, cobalt, iron, and petroleum.

2. Agricultural Production

Types of agricultural production are production activities that add value or create value to animals and plants. In a narrow sense, agrarian production includes production in agriculture such as rice. However, broadly similar fields such as plantations, animal husbandry, fisheries, and forestry are also included in agrarian production.

3. Industrial Production

This type of industrial production is an industrial activity that provides added value or creates value by converting raw goods into semi-finished goods or finished goods. Examples of industrial production activities such as processing packaged food, clothing, construction materials, motor vehicles, electronic equipment, and so on.

4. Trade

Although trade does not change the form of goods, trade can be categorized as a production activity because trade moves goods from producers to consumers. In general, traders will buy goods from manufacturers at a more affordable price with wholesale purchases. Then they sell it to buyers, both consumers and retailers, at a price difference in order to make a profit.

5. Services

Service production is a production activity that provides services to consumers. The results of production output in the service sector cannot be seen in their form because they are not in the form of physical goods. Products and services can only be felt the benefits. Examples of products in the service sector are telecommunications, health, education, entertainment, and banking services.

Production Theory Regarding Production Stages

Meanwhile, other production theories mention several stages in carrying out production activities. The explanation below will lead us to an understanding of the stages of production.

1. Primary Stage

This division of primary production stages applies to production activities in the fields of extraction and agriculture. This primary stage produces goods that are still very basic in nature, so that some can be consumed directly by consumers, but there are also those that require further processing so that they can be consumed by consumers.

We take the example of petroleum products in the production of extraction requires further processing by factories. Meanwhile, for agricultural production activities, the results can be consumed directly by consumers. For example, fruits that consumers can buy at fruit shops to eat immediately.

2. Secondary Stage

The secondary production stage is a continuation of the primary production. The raw materials produced in the primary stage require further processing. In general, what is included in this stage is the industrial sector. Raw goods which are the result of primary production are processed into finished goods or ready to use.

For example, goods produced in the primary stage are rubber latex. These commodities are raw goods that need to be reprocessed through a secondary stage so that rubber latex can be used as tires for motorized vehicles, rubber balls, shoe mats, and electrical insulators. Production results in the secondary stage will be sold through shops, markets, supermarkets, and others.

3. Tertiary Stage

Tertiary production stages are production stages whose main purpose is to facilitate the manufacture of goods and to distribute goods from producers to consumers. Production in trade and services is part of the tertiary stage of production. With the role of the trade sector, the goods or services produced can reach consumers.

Services also play a role at this stage. Call it the role of package delivery services that help the goods arrive from the seller to the consumer. In today’s era, the role of shipping services is very vital because it also determines whether or not a transaction is made. Another example of services at this stage is the role of banks or fintech which helps the cashless payment process. Without payment services, sellers and buyers will have difficulty conducting long-distance transactions.

Production Theory of Factors of Production

Another theory of production that we need to study is the factors of production. If discussed briefly, factors of production are everything or resources that are needed and have a link in carrying out the production process. There are many factors of production, but broadly speaking, the factors of production are divided into two major groups, namely the original production factors and the derived production factors. We will discuss in more detail below:

1. Original Factors of Production

The original production factors include natural resources and labor. That’s right,  just those two things. Why are old resources and labor said to be the original factors of production? Because only with these two factors, humans can produce goods.

The natural resources referred to here include air, animals, plants, harvesting natural products, and others. With these materials humans can process them into raw materials, semi-finished, or even finished goods.

Meanwhile, labor is humans who process these natural resources into goods that are ready for consumption.

2. Derivative Factors of Production

Derived production factors are factors of production that are not directly related and are works that originate from the thoughts and progress of human culture. Among the derivative production factors are capital, entrepreneurship or entrepreneurship, and technology.

Production on a large scale requires capital in order to achieve the targeted output. Capital includes funds, machinery, buildings, and other equipment that play a role in the production process. While what is meant by entrepreneurship is the ability of a person to manage a team to a business so that the business being run generates profits. Utilization of appropriate technology is also an important factor in production so that production activities can run effectively and efficiently.

Production Theory of Productivity

This production theory discusses how the ability of a company to produce goods and/or services that will be offered to consumers. The company will try to increase the number of goods and/or services produced so that it can serve more and more consumers.

In general, companies can increase their productivity by using three methods, namely extensive, intensive, and . Extensive method is a way to increase productivity by adding factors of production. Examples of this extensive method are increasing the number of workers, factories, agricultural land, and others. Of course, with the addition of these factors of production, the cost of production also increases.

Intensive methods are used to increase productivity by increasing the productivity of production factors. For example, to improve the skills of the workforce, special training is held, or technology updates in the company.

Production Theory of Production Costs

The production process of course requires production costs. The theory of production this time will discuss what is included in the cost of production. In production theory, production costs are divided into three types, namely fixed, variable and total production costs. In detail, it will be discussed as explained below.

1. Fixed Cost of Production (Fixed Cost)

Fixed production costs are costs required for the production process and the nominal is fixed. Regardless of the amount of goods and/or services produced, the nominal cost is fixed. Examples of fixed production costs include building rental costs, land and building taxes, equipment purchases, employee basic salaries, and insurance.

2. Variable Cost of Production (Variable Cost)

Variable production costs are production costs incurred by the company for the production process and the nominal changes according to the number of products produced. The greater the volume of production, the greater the costs to be incurred by the company and vice versa. The amount of this cost is highly dependent on business activities.

Examples of expenses that are included in variable costs are direct materials, direct labor, wages for overtime workers, sales commissions, and maintenance of production equipment.

3. Total Production Cost (Total Cost)

The total production cost is calculated by adding up the variable costs and fixed costs. For example, the production of catering involves food, labor, gas, electricity, water, transportation, packaging, and so on. Then the total cost of production is obtained by adding all the components of these costs.

4. Average Production Cost (Average Cost)

The average production cost is obtained by dividing the total production cost by the amount of production. This is important to know so that the company can predict the profits that will be made by selling one unit of product.

Production Theory on The Law Of Diminishing Return

The theory of production this time was formulated by David Ricardo. In his presentation, David stated that there was an anomaly in the production process. He explained that the addition of production factors does not necessarily increase linear production results. At a certain point, the production output will decrease even though the factors of production are added.

The continuous addition of inputs makes the number of inputs exceed the production capacity and results in the achievement of a saturation point. This causes productivity is not optimal.

Let’s take the example of a company that employs a worker can produce as many as 100 goods. If one more worker is added, then in a day the products produced are as many as 250 pieces. If you add another person, it means three workers, 400 items will be produced. In the table below, the amount of production and the addition of workers will be explained.

In the table we find that at a certain point, productivity decreases. To more clearly observe the relationship between the number of workers, total product, average product (AP), and marginal product (MP), we can observe the graph below.

Solutions that can be done in dealing with this are:

  1. One of the factors of production must remain constant so that only the comparison changes. Factors ofproduction that can be fixed in quantity can be in the form of land area in agriculture or machinery in industry.
  2. The production techniques used must be more sophisticated. Because the same production technique does not affect productivity when it is at saturation point.
  3. Work power must be increased. Suppose a company that increases the number of workers. It is advisable not only to increase the number of workers, but also to improve the quality of human resources.

Theory of the Production Function

The production function is a function in the form of a mathematical equation that describes the relationship between output and input used during the production process. The production function predicts the number of possible outputs produced by the producer by combining the various possible inputs.

With the production function, producers can design the cost of goods manufactured and the quantity of products produced. Not only that, the production function can also provide an overview of the input combinations that must be used.

For example, according to the calculation of the production function, a company can produce a maximum of 500 units of X and 750 units of Y in a day. So to achieve this quantity, what factors of production need to be prepared and in how much.


From the explanation above, it can be understood that production theory is needed by producers in order to understand the preparation required, the production process itself, and production costs. By understanding the theory of production thoroughly, it is hoped that the company can increase the effectiveness and efficiency in carrying out production.

This production theory is widely studied and applied by companies that want to minimize waste or unnecessary expenses. However, this production theory will be useful for companies who study it well and apply it to their business. Because theory that is only learned without application will not bear fruit.

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