Section 2 - Production

• Production


  The process of creating, growing, manufacturing or improving goods and services
• Productivity


  The efficiency or rate of production, the amount of output per unit of input (e.g. labor, equipment, capital)
• Factors of Production


  • Capital
  • Enterprise
  • Land
  • Labor
• Capital


  Assets that allow for increased work productivity, including physical tools, plants and equipment
• Enterprise


  The entrepreneur who coordinates and combines the other factors of production to earn a profit
• Land


  Any naturally occurring resource used to produce goods and services, including water, oil, copper, natural gas, coal, forests
• Labor


  The physical and mental efforts of people contributing to the production of goods and services
• Rewards for factors of production

  • Capital is rewarded through interest
  • Land is rewarded through rent
  • Enterprise is rewarded through profit
  • Labor is rewarded through wages and salaries
• Land


  • It is the primary factor of production as it provides the necessary natural resources and space for production
  • Land resources can be renewable or non-renewable
• Capital accumulation


  An increase in assets from investments or profits, a building block of a capitalist economy
• Return on Investment (ROI)


  A performance measure used to evaluate the efficiency of an investment, calculated as net profit divided by cost of investment
• Entrepreneur


  A person who coordinates and combines the factors of production to earn a profit, vital for economic growth
• Labor


  • It is inseparable from the laborer
  • It requires human effort
  • It has poor bargaining power
  • Its supply is relatively inelastic
  • It is perishable in nature
• Labor productivity


  The output created per unit of labor time, determined by physical capital, human capital, and technological change
• Labor efficiency


  The productive capacity of a worker, influenced by worker ability, willingness, health, work environment, and climate
• Labor force


  The total number of people employed plus those unemployed and seeking employment, can be increased through migration, education, population growth, and adjusting minimum age
• Division of labor


  The separation of a work process into tasks performed by separate individuals or groups, aimed at mass production
• Specialization of labor


  The division of labor focused on the product rather than the process
• Short run


  The period of time where at least one factor of production is fixed
• Long run


  The period of time where all factors of production are variable
• Fixed factors of production

  • Buildings
  • Land
  • Machinery
  • Plants
• Variable factors of production

  • Ordinary labor
  • Power
  • Fuel/Energy
• Fixed cost


  A cost that does not change with changes in output

  
• Variable cost


  A cost that varies with the level of output, increasing or decreasing with production volume

  
• Total cost


  The total economic cost of production
• Average cost


  The total cost of production divided by the number of units produced
• Marginal cost


  The change in total cost from producing one additional unit
• As output increases


  Variable costs increase, fixed costs remain constant, total costs increase

  
• As output increases


  Average costs first decrease due to economies of scale, then increase due to diseconomies of scale

  
• As output increases


  Marginal costs first decrease, then increase as they rise above average costs

  
• Productive optimum


  The point where average cost is minimized, representing productive efficiency
• Economies of scale occur before the productive optimum, diseconomies of scale occur after
• Productive optimum


  The lowest point of the Average Cost Curve
• Economies-of-scale


  Everything on the left-hand side of the average cost graph

  
• Diseconomies-of-scale


  Everything on the right-hand side of the average cost graph

  
• Before productive optimum


  The Average Cost is higher than the Marginal Cost, a business would experience economies-of-scale
• After productive optimum


  The Marginal Cost is higher than the Average Cost, a business would experience diseconomies-of-scale
• The Marginal goes above the Average Cost because it is logical to assume that additional units are more costly to produce
• Productive efficiency


  An economic term describing a level in which an economy or entity can no longer produce additional amounts of goods without lowering the production level of another product
• Goods


  Material items that the customers are to purchase for a price, tangible items that can be touched