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Production and Cost Analysis

The document discusses production and cost analysis in managerial economics, defining production as the transformation of inputs into outputs and identifying factors affecting production such as technology and input types. It explains the concepts of fixed and variable inputs, production functions, and the law of diminishing returns, along with various cost concepts including private, social, explicit, and implicit costs. Additionally, it covers economies of scale and scope, illustrating how firms can reduce costs through increased production and diversification.

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benjustinejames
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17 views31 pages

Production and Cost Analysis

The document discusses production and cost analysis in managerial economics, defining production as the transformation of inputs into outputs and identifying factors affecting production such as technology and input types. It explains the concepts of fixed and variable inputs, production functions, and the law of diminishing returns, along with various cost concepts including private, social, explicit, and implicit costs. Additionally, it covers economies of scale and scope, illustrating how firms can reduce costs through increased production and diversification.

Uploaded by

benjustinejames
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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PRODUCTION AND

COST ANALYSIS
MANAGERIAL ECONOMICS
Definition of Production

Production is the process of transforming inputs


into outputs. It can also be defined as an act of
creating value or utility. The end products of the
production process are outputs which could be
tangible (goods) or intangible (services).
Factors Affecting Production

Technology
 A firm’s production behaviour is fundamentally
determined by the state of technology. Existing
technology sets upper limits for the production of the
firm, irrespective of the nature of output and size of
the firm.
Inputs
 Inputs are economic resources that can be used in
the production of goods and services.
Factors Affecting Production

Period of Production
 The variability of an input depends on the length of
the time period under consideration. The shorter the
time period, the more difficult it becomes to vary the
inputs.
Two Types of Inputs

Fixed inputs are those inputs whose quantity


cannot readily be changed when market conditions
indicate that an immediate adjustment in output is
required. Remain the same in the short period, In the
long run fixed inputs are become varies. The cost of
these inputs are called Fixed Cost. Buildings, land
and machineries are examples of fixed inputs
because their quantity cannot be manipulated easily
in a short period of time.
Two Types of Inputs

Variable inputs are those inputs whose


quantity can be altered almost
instantaneously in response to desired
changes in output. The cost of variable
inputs is called Variable Cost. The best
example of variable input is labor, raw
materials, etc.
Two Period of Production

1.Short-Run – refers to the period of time over


which the amount of some inputs, called the ‘fixed
inputs’, cannot be changed.
2.Long-Run – is defined as the time period during
which all factors of production can be varied.
Production Function

Production function is a technical relationship


between inputs and outputs.
It shows the maximum output that can be produced
with fixed amount of inputs and the existing technology.
A production function may take the form of an algebraic
equation, table or graph. A general equation for
production function can, for instance, be described as:
Q = f( x1, x2, x3,…, xn )

where Q is the output and x1, x2, x3,…, xn are different


types of input.
Production Function with One
Variable Input

MPL = ∆TP/∆L
Where, ∆TP stands for change in total production
∆L stands for change in labor input
MPL stands for marginal product of labor
Similarly, average product of labor (APL) may be defined as
APL = TP/L
Where, TP stands for total production. APL stands for
average product for labor.
Hypothetical Schedule of TP, MP
and AP
TP, MP and AP
Curves Showing
Three Stages of
Production
The Law of Diminishing Returns

This law states that as successive units of a variable


input are added to a fixed input, beyond some point the
extra or marginal product that can be attributed to each
additional unit of the variable resource will decline.
 This law assumes that technology is fixed and thus
the techniques of production do not change.
 The law starts to operate after the marginal product
curve reaches its maximum
Definition of Cost

 Costs are the monetary values of


expenditures that have been used to produce
something.
 Forproducing a commodity, a firm requires
various factor inputs as well as nonfactor
inputs. The expenditures the firm incurs on
these inputs refers to the cost of production.
However, in economics, we use different
concepts relating to cost.
Private Cost and Social Cost

 Private
cost refers to cost of production
incurred by an individual firm in
producing a commodity.
 Social
cost, on the other hand, refers to
the cost that the society has to bear on
account of production of a commodity.
OPPORTUNITY COST

 This is the value of the next best


alternative use of a resource or good.
 It is the value sacrificed when a choice
is made.
Explicit Cost and Implicit Cost

 Actual payments made by a firm for


purchasing or hiring resources from the
factor-owners or other firms are called
explicit costs.
 Implicit
costs refer to the imputed costs
of the factors of production owned by
the producer himself/herself.
Cost functions: Short-run

The short-run total cost function shows


the lowest total cost of producing each
quantity when one factor is fixed. The
fixed cost must be paid regardless of
whether any of the good is produced. The
variable cost will increase when the
quantity produced increases.
Total Fixed Cost, Total Variable
Cost, and Total Cost
Cost functions: Long-run

Long-run cost functions are used to


determine the minimum cost of producing a
given level of output when all inputs are
variable. They are important because they
help businesses understand how to produce
goods and services most efficiently, and how
changes to inputs will affect costs.
Economies of Scale

Economies of scale refer to the cost


advantage that arises when companies
increase production and lower their average
cost per unit. This typically happens because
fixed costs are spread over a larger number of
goods, or companies can negotiate better
deals on inputs due to larger order sizes.
Economies of Scale

Large-scale producers, such as electronics and


automotive companies, benefit significantly
from economies of scale. Firms like Yazaki-
Torres and Toyota Philippines lower their
production costs through mass production,
bulk purchasing of materials, and utilizing
advanced technology.
Economies of Scope

Economies of scope occur when it is cheaper


to produce multiple products together rather
than separately. This happens when a
company uses the same resources,
technology, or infrastructure to produce a
range of goods or services, thereby lowering
overall costs.
Economies of Scope

One of the most notable examples, San Miguel


operates in various sectors, including food,
beverages, energy, and infrastructure. By leveraging
its extensive distribution networks, manufacturing
facilities, and brand recognition, the company
reduces its overall costs while producing a wide array
of products like beer, dairy, processed foods, and
even running infrastructure projects like toll roads
and power plants.
THANK YOU
PRESENTED BY: BEN JUSTINE JAMES
INSTRUCTOR: DONALD P. VILLAMARZO

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