Theory of Production


Welcome to class! 

In today’s class, we will be talking about the theory of production. Enjoy the class!

Theory of Production

Theory of Production


At the end of the lesson, you should be able to;

  • Define production;
  • Identify and explain types of production;
  • Outline and analyse factors of production and their reward


Production has diverse meaning, but the usage depends on the context in which it is used.

Production in economics may be defined as the various economic activities aimed at the creation of goods and services and the distribution of these goods to the final consumers for the satisfaction of human wants. That is, production is the making available of goods and services to those who are willing and able to pay for them for the satisfaction of their wants.

Production may equally be defined as the creation of utility while the utility is the ability of a commodity or service to satisfy human wants. All goods and services produced must possess utility, which means that they must be capable of satisfying certain human wants.

In effect, economics is not concerned with whether something is good or bad. Its interest is in whether that thing is desired by someone prepared to pay for it. Production in economics is never complete until the goods and services produced gets to the final consumers.

Types of goods

There are two basic types of goods:

  • Consumers Goods:

These are goods that have reached their consumable stage that is; they are ready for use by the consumer without undergoing a further process of production. They can be durable or non- durable goods.

  1. Durable goods have a life span usually more than one year and can be used over and over again e.g. radio, shoes, chairs, computer
  2. Non – Durable goods are perishable goods that are consumed almost immediately due to their precarious nature e.g. bread, yam, garri, apple etc.
  •  Capital/Producer goods:

These are goods which can be used to produce other goods and services. They include such goods as sewing, machines, vehicles etc.

Other types of goods Includes

  1. Non-Economic Goods/Free Goods: These goods are very useful to human existence and survival but not scarce, and thus cannot normally command a price. They are freely available in any quantity desirable to man since they are freely got from nature,e.g. air, rain, and water sunshine etc.
  2. Economic Goods: These are any goods that are useful or valuable and at the same time scarce in its available quantity and which command a price as people are prepared to pay to possess them. They can be utilized and priced according to value and volume.


  1. List and explain the types of goods?
  2. Define is production.

Types of production

Production is divided into two – Direct and Indirect Production.

  1. Direct production: This is the creation of goods and services to satisfy household requirements it is a small scale production to meet family needs.
  2. Indirect production: It is the production by specialization for exchange. That is the producer is not attempting to satisfy his wants directly except to a very limited extent.

Classification of production

  1. Primary Production
  2. Secondary production
  3. Tertiary Production
  • Primary production:

This is the first stage of production which is concerned with the extraction of raw materials from land, air and sea. It includes amongst many others produce from agriculture such as animal husbandry, mining, quarrying, oil drilling, coal, crude oil etc.

  •  Secondary production:

This is the processing and transformation of raw materials from primary production into finished goods. At this second stage of production, the utility is added to the basic raw materials from primary production. Those in the manufacturing and construction industries are engaged in secondary production.

  •  Tertiary production:

This is the last stage of production which is concerned with the commercial activities and rendering of both direct and indirect services. It is mainly concerned with the distribution of produced goods until they reach the final consumers. Examples are wholesalers, retailers, barbers, bakers, hairdressers, teachers, musicians, soldiers etc.

Factors of production

These are agents of production which are combined in different proportions to achieve production of goods and services. These four factors are:

    Factors of production                                        Reward

  1. Land                                                                 Rent
  2. Labour                                                    Wages/salaries
  3. Capital                                                            Interest
  4. Entrepreneurship                                             Profit

Factors determining the volume of production

  1. Availability of capital to a producer.
  2. Availability of raw materials.
  3. Level of efficiency in management.
  4. Size of the market.
  5. The efficiency of other factors of production.
  6. High level of technology.
  7. The nature of the product.

Importance of production

  1. It helps to ensure the availability of goods and services.
  2. It helps to improve the standard of living of people.
  3. It helps to provide employment opportunities to people.
  4. It helps to enhance increment in people wealth.
  5. It helps to boost the country’s export potentials.
  6. It helps in the acquisition of skills.
  7. It helps to generate income for the government.


  1. Define production.
  2. When is production said to be completed in economics?
  3. List the agents/factors of production and give their rewards.

Reading assignment

Amplified and Simplified Economics for SSS by Femi Longe page 41-45

General evaluation
  1. What is meant by the term production?
  2. Explain with examples the following type of production.       (a) Direct production    (b) indirect production
  3. Differentiate between consumer goods and capital goods.
  4. Discuss three importance of production
  5. Define Production
  6. List the agents/factors of production and give their rewards


In our next class, we will be talking about Land as a Factor of Production.  We hope you enjoyed the class.

Should you have any further question, feel free to ask in the comment section below and trust us to respond as soon as possible.

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