PRODUCTION

“Production is the organised activity of

transforming resources into finished
products in the form of goods and
services; the objective of production is
to satisfy the demand for such
transformed resources”.
 FACTORS OF PRODUCTION

▪ Factors of production are the economic resources needed

to produce goods and services. Three factors of
production: land, labor, capital and
organization/entrepreneurship. Entrepreneurship ties
these factors together into a productive enterprise.

1-LAND
2-LABOR
3- CAPITAL
4- ENTREPRENEURSHIP
How these factors are interconnected is critical

The Circular Flow Product Market

Model

Source: http://en.wikipedia.org/wiki/Circular_flow Factor Market

Production: Economics of Scale

► Technical
► Specialization (workforce)
► Marketing
► Financial
Returns to Scale

There are 3 returns to scales in production.

a)INCREASING RETURNS TO SCALE occur when the %

change in output > % change in inputs.

b)DECREASING RETURNS TO SCALE occur when the %

change in output < % change in inputs.

c)CONSTANT RETURNS TO SCALE occur when the %

change in output = % change in inputs.
COST, PROFIT &
PRODUCTS
Total Revenue, Total Cost, Profit

Profit = Total revenue – Total cost

the amount the market

a firm value of
receives the inputs
from the a firm uses
sale of its in
output production
THE COSTS OF
9 PRODUCTION
Total Revenue, TC, Profit

► Total Revenue
► The amount a firm receives for the sale of its output.
► Total Cost
► The market value of the inputs a firm uses in production.
► Profit is the firm’s total revenue minus its total cost.
► Profit = Total revenue - Total cost
TYPES OF COSTS

1. Explicit cost
2. Implicit cost
3. Opportunity cost
4. Incremental cost
5. Sunk cost
Conti:

6. Fixed Cost
7. Variable Cost
8. Shutdown cost
9. Total Cost
10. Replacement cost
Cost Formulas

i. Total Cost = TC = FC + VC
ii. Average Variable Cost = AVC = VC/Q
iii. Average Fixed Cost =AFC = FC/Q
iv. Average Total Cost=ATC= AVC + AFC
v. Average Revenue = AR = TR/Q
MR & MC
PROBLEM 1
Problem:2
ABC MANUFACTURING COMPANY

Labor Output (Q) FC VC TC AVC AFC ATC

0 - 15,000 -

1 4000 15,000 10,000

2 7000 15,000 20,000

3 9000 15,000 30,000

4 10,000 15,000 40,000

5 10,600 15,000 ?

6 11000 15,000 ?

7 11400 15,000 ?

8 11200 ? ?

9 11000 ? ?

10 10900 ? ?

Note: suppose FC is $15000, and VC would be $10,000

THANKS

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