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  • Production means creation of utility.
  • For the production process to work there must exist factors with which to produce goods.
  • Factors of production are classified as land, labour, capital and enterprise.
  • Factors of production can be divided into two categories – fixed factors and variable factors.
  • Fixed factors are those factors whose quantity remains unchanged in the short run.
  • Variable factors change with the change in the level of output.
  • In the short run to increase production, fixed factors are not varied. Only one variable factors will be changed.
  • In the long run to increase production, all the factors will be varied.
  • Law of variable proportion or law of diminishing return is relevant when some factors are kept fixed and one is varied. It is applicable for the short run period.
  • Total product is the total output resulting from the efforts of all the factors of production combined together at any time. Average product is the total product per unit of the variable factor and Marginal product is the change in total product per unit due to change in the quantity of variable factor.
  • Law of returns to scale describes the relationship between input and outputs in the long run when all inputs are increased in the same proportion. It may be constant, increasing and decreasing.
  • Returns to scale occur due to economies of scale. There are two types of economies of scale (i) Internal economies to scale and (ii) External economies to scale.
  • Internal economies accrue to a firm when it engages in large scale production. External economies accrue to an industry as a whole.

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