Managerial Economics - Production Decision

Production Decision

A firm needs to answer four basic questions - what to produce, how to produce and how much to produce and for whom to produce.

What to produce?

A firm will produce according to its perception of the customer demand. It can either produce consumer goods like food, clothing etc. (which are for consumption purpose) or it can produce capital goods like machinery etc. (which are for investment purposes).

How to produce?

Goods can be produced by certain techniques. Firms have the option of producing goods by labour intensive technique and capital intensive technique. Labour intensive technique is the one in which manual labour is used to produce goods. Capital intensive technique is the one in which machinery like forklift, assembly belts etc. are used to produce goods.

How much to produce?

A firm has to decide its production capacity and also how much of their good a consumer needs and produce accordingly.

For whom to produce?

A firm has to decide its target population (i.e. to whom they will serve products and/or services). Example, it will not be viable to produce luxurious goods or middle income or low income group if they can't afford it and produce basic necessity goods for rich class if they don't need it. Therefore, a firm needs to match its produce according to the target population it is serving.