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Production and Cost

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27 views3 pages

Production and Cost

Uploaded by

Jovie Tandoc
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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MANGASER, JENNILYN M.

BSED 2 SOCIAL STUDIES


MICROECONOMICS
REPORTING

PRODUCTION AND COSTS

PRODUCTION
 refers to the economic process of converting of inputs into outputs. Production uses
resources to create a good or service that is suitable for exchange.
COSTS
 is the monetary value of goods and services purchased by producers and consumers.

TYPES OF COSTS of PRODUCTION


 Fixed costs- a cost that does not change as output changes
 Variable cost- is a cost that changes as output changes
 Opportunity cost-it is defined as the cost of an alternative that is forgone in order to
pursue a cetain action.
 Marginal cost- the change in total production cost that comes from making or poducing
one additional unit
 Average cost- total cost per unit or output.

TECHNOLOGICAL CONSTRAINTS
 Technological constraint can be defined as any technology-related interruptions in the
business processes. This constraint prevents the company from providing complete
value service to its customers. The technological world is dynamic; it changes every
single minute.

 In this context, technology refers to all alternative methods of combining inputs to


produce outputs. It does not refer to a specific new invention like the tablet computer.
The firm will search for the production technology that allows it to produce the desired
level of output at the lowest cost.
 Constraints can be defined as some of the drawbacks of a project or business project
that affect the business's productivity. It majorly impacts the production, quality of the
products, effectiveness, and efficiency of the business.
 When firms make output decisions, they are faced by technological constraints i.e. to
achieve a desired level of production, firms have to choose from a limited number of
feasible ways of combining inputs. Mathematically, production technology is expressed in
the form of a production function, a tool for expressing the engineering relationship
between inputs and outputs.

PRODUCTION FUNCTION
 A production function relates the input of factors of production to the output of goods. In
the basic production function inputs are typically capital and labor, though more
expansive and complex production functions may include other variables such as land or
natural resources.
 Firms use the production function to determine how much output they should produce
given the price of a good, and what combination of inputs they should use to produce
given the price of capital and labor.

Short run and long run cost curves are graphical representations of the relationship between
the level of output produced by a firm and the corresponding costs incurred in the production
process. Here's an overview of each:
1. Short Run Cost Curves:
 In the short run, at least one factor of production is fixed, typically capital, while
other factors, like labor, are variable.
 Short run cost curves illustrate the relationship between the level of output and
costs when at least one factor of production is fixed.
 The main short run cost curves are:
 Total Cost (TC) Curve: This curve shows the total cost incurred by the
firm at different levels of output. It is the sum of fixed costs (FC) and
variable costs (VC).
 Average Total Cost (ATC) Curve: Also known as the average cost
curve, it represents the average total cost per unit of output. It is derived
by dividing total cost (TC) by the quantity of output (Q), ATC = TC / Q.
 Average Variable Cost (AVC) Curve: This curve represents the average
variable cost per unit of output. It is derived by dividing variable cost (VC)
by the quantity of output (Q), AVC = VC / Q.
 Average Fixed Cost (AFC) Curve: This curve represents the average
fixed cost per unit of output. It is derived by dividing fixed cost (FC) by the
quantity of output (Q), AFC = FC / Q.
 Marginal Cost (MC) Curve: This curve shows the additional cost
incurred by producing one more unit of output. It intersects the average
variable cost and average total cost curves at their minimum points.
2. Long Run Cost Curves:
 In the long run, all factors of production are variable, allowing the firm to adjust
inputs and production levels more flexibly.
 Long run cost curves illustrate the relationship between the level of output and
costs when all inputs are variable.
 The primary long run cost curve is the:
 Long Run Average Cost (LRAC) Curve: Also known as the long run
average cost curve or the envelope curve, it represents the lowest
possible average cost of producing each level of output when all inputs
are variable. It is derived by analyzing the combination of inputs that
minimizes average cost for each level of output.

Profit Maximization and Cost Minimization


.
Profit maximization and cost minimization are two primary objectives that firms aim to
achieve in their operations. Here's an overview of each concept:
1. Profit Maximization:
 Profit maximization is the goal of maximizing the difference between total
revenue and total cost.
 Mathematically, profit (π) is calculated as:
π=Total Revenue –Total Cost
 Firms aim to produce the quantity of output that results in the highest profit. This
is typically achieved where marginal revenue (MR) equals marginal cost (MC).
 The profit-maximizing level of output can be identified graphically by finding the
point where the marginal revenue (MR) curve intersects the marginal cost (MC)
curve.
 However, in real-world scenarios, firms also consider other factors such as
market demand, competition, and strategic objectives when determining their
optimal level of production.
2. Cost Minimization:
 Cost minimization involves reducing the total cost of production for a given level
of output or achieving a certain level of output with the lowest possible cost.
 Firms seek to minimize both total cost and average cost per unit of output.
 To achieve cost minimization, firms often employ techniques such as optimizing
production processes, improving efficiency, and reducing waste.
 Cost minimization does not necessarily mean cutting costs indiscriminately;
rather, it involves finding the optimal balance between inputs and outputs to
achieve cost efficiency.
 In the short run, firms may have limited flexibility in adjusting all factors of
production, so cost minimization may involve optimizing the use of available
inputs.
 In the long run, firms have more flexibility to adjust all factors of production,
allowing them to optimize production techniques, adopt new technologies, and
achieve economies of scale to minimize costs.

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