Production of Goods and Costs

• Production


  Any economic activity which combines the four factors of production to form an output that will give direct satisfaction to customers
• Production process


  Converting inputs into output
• Technology


  Body of knowledge applied to how goods are produced
• Technology


  • Production process employed by firms in creating goods and services
• Labor intensive


  Production that requires a higher labor input to carry out production activities in comparison to the amount of capital required
• Labor intensive industries


  • Agriculture, restaurants, hotel industry, mining and other industries that require much manpower to produce goods and services
• Labor intensive industries


  • Depend mostly on the workers and employees of their firms, require higher investment and time to train and coach workers to produce goods and services according to specified standards, production occurs on a small scale
• Capital intensive


  Production that requires higher capital investment such as financial resources, sophisticated machinery, more automated machines, the latest equipment
• Capital intensive industries


  • Oil refining industry, telecommunications industry, airline industry, public transport authorities that maintain the roads, railways, trains, trams
• Capital intensive is more expensive and requires a higher capital investment, labor intensive production requires more labor input and requires higher investment in training and education of employees
• Short run


  A period of time so short that there is at least one fixed input and the quantities of other inputs can be varied, therefore changes in the output level must be accomplished
• Long run


  A period of time so long that all inputs are considered variable
• There is no fixed time that can be marked on the calendar to separate the short run from the long run. The short run and long run distinction varies from one industry to another
• Fixed inputs


  Any resource the quantity of which cannot readily be changed when market conditions indicate that a change in output is desirable
• Variable inputs


  Any economic resource the quantity of which can be easily changed in reaction to change in the level of output
• Production function


  A functional relationship between quantities of inputs used in production and outputs to be produced, it specifies the maximum output that can be produced with a given quantity of inputs given the existing technology of the firm
• Production function


  • 1 t-shirt = 1 sewing machine, 2 threads, 1 sewer, 2 fabrics, etc
• Total product (TP)


  Refers to total output produced after utilizing the fixed and variable inputs in the production process
• Marginal product (MP)


  The extra output produced by 1 additional unit of input while others are held constant
• Average product (AP)


  Equal to the total product divided by the total units of input used
• The output or product may be described in three ways: Total Product (TP), Average Product (AP), and Marginal Product (MP)
• Cost


  Refers to all expenses acquired during the economic activity or the production of goods and services
• Explicit costs


  Payments to non owners of a firm for their resources such as labor or use of a building, expenses made for the use of resources not owned by the firm itself
• Implicit costs


  Opportunity costs of using resources owned by the firm, these are opportunity costs of resources because the firm makes no actual payment
• Economic profit


  A firm's economic profit is equal total revenue less total cost
• Sunk cost


  Fixed costs that once we have obligated ourselves to pay them, the money becomes sunk into the business
• Fixed cost


  Costs that do not vary with different levels of production and fixed costs exist even if the output is zero
• Fixed costs


  • Rent, salaries
• Variable costs


  Costs that vary with the level of output
• Variable costs


  • Electricity
• Average variable cost (AVC)


  Variable Costs/Quantity
• Marginal cost


  The increase in cost caused by producing one more unit of the good
• Total cost (TC)


  TC = Total Fixed Cost + Total Variable Cost
• Average total cost (ATC)

  Total Cost/Quantity (Total Cost = Fixed Cost + Variable Cost)
• Marginal costs are the additional costs that arise from producing one more unit of output, while average costs are the total costs divided by the number of units produced.
• The marginal cost curve is the slope of the total cost curve.
• Average fixed costs (AFC) = Fixed costs / Quantity
• Increasing returns to scale occur when an increase in all inputs leads to a greater than proportional increase in output.
• Decreasing returns to scale occur when an increase in all inputs leads to a less than proportional increase in output.
• Constant returns to scale occur when an increase in all inputs leads to a proportionate increase in output.