PRODUCTION and COST

The Concept of ProductionTransforming Inputs into OutputsCategories of Production ActivitiesProduction FunctionsAnalysis of the Production ProcessProduction with One Variable InputTotal, Average and Marginal ProductsCost of Production

Short-Run CostsLong-Run Costs

Production with Two Variable Inputs

The creation of any good or service for the purpose of selling to buyers is called

production.

Production, in general, is any activity that creates value.

THE CONCEPT OF PRODUCTION

Production is an activity where inputs are transformed into outputs. To be able to do it, the following are required:

Assembling the necessary inputs; and

Transforming the inputs though a recipe and technological process into outputs of goods and services

TRANSFORMING INPUTS INTO OUTPUTS

CapitalLaborLandEntrepreneurial or Managerial Talent

The various inputs consist of:

In economics, it refers to produced goods used in the production of other goods.

Capital

Which combines and process the various materials

Labor

where the space allotted for processing is located

Land

which performs functions like supervision, planning, control, coordination and leadership.

Entrepreneurial or Managerial Talent

Teachers

Administrators

Buildings

Supplies

Equipment

(the mean of transforming inputs into outputs)

- Like actual classroom activities

- Educated children

Figure 24EDUCATION AS A PRODUCTION ACTIVITY

INPUTS

PRODUCTION

ACTIVITY

OUTPUTS

1.Unique-product production2.Rigid mass production3.Flexible mass production4.Process or flow production

CATEGORIES OF PRODUCTION ACTIVITIES

This type of production activity has as its output “made-to-order” products and services. High demands on skill and craftsmanship typify a unique-product production.

Unique-Product Production

This production activity involves the manufacture of uniform products in large quantity using a well defined, proven and usually inflexible technology.

Rigid Mass Production

In this type of production activity, processing is done in two stages. The first stage involves mass production of standardized components. In the second stage, the components are assembled into final products that appear different from one another.

Flexible Mass Production

This production activity is highly automated and mechanized, resulting to high production efficiency when operated at capacity or near capacity 24 hours a day and 7 days a week.

Process or Flow Production

The relationship between the amount of inputs required and the amount of output that can be obtained is referred to as the “production functions”.

PRODUCTION FUNCTIONS

the classes of inputs; and

The time frame references

ANALYSIS OF THE PRODUCTION PROCESS

Inputs are classified as either fixed or variable. A fixed input is one whose quantity cannot be readily changed when market conditions indicate that a change in output is desirable.

A variable input is one whose quantity can be readily changed when a change in output is desired.

The time references consist of the short-run and the long-run.

The short-run refers to that time frame in which the input of one or more productive agents is fixed.

The long-run is that period of time in which all inputs are variable. This is because when fixed inputs need adjustment, it can be done when given sufficient time.

The number of inputs in any production process varies from one to about a hundred. Fro instance, we can assume that there is only one variable input which can be combined in different proportions with fixed inputs to produce various quantity.

PRODUCTION WITH ONE VARIABLE INPUT

Total output- refers to the total amount of output produced in physical units such as bags of fertilizer, bottles of vinegar or pairs of shoes.

Average product- refers to the total output divided by the quantity of the variable inputs under consideration.

Marginal product- is the additional output attributed to the increase in the quantity of the variable inputs under consideration.

(an example is provided in table 10)

Total, Average and Marginal Products

In relation to the decrease in the rate of marginal product, the law of diminishing returns may be stated as follows:

“ As more of the same input is employed in the production of a particular good, the corresponding increase in total output tends to become smaller and smaller, if the amount of the other inputs required in the production process are kept constant.”

Short-run CostsProducing the output requires a

combination of fixed and variable costs.

COST OF PRODUCTION

oTotal cost- refers to the sum of all the expenditures in producing goods and services.

oFixed cost- is that portion of the total cost which remains unchanged even if the level of output changes.

oVariable cost- is that part of total cost that do vary with the amount of output produced.

Fixed inputs that cannot be changed in the short run can be increased (or decreased) in the long run. To increase capacity, additions to building, land, machinery or even managerial talents may be made.

Long-run Costs

As operations expand, there are factors like division of labor and technology that reduces the average cost. When this happens, economics of size is attained. When there is an increase in the average cost due to limited management efficiency and limited amount of resources, the situation is called diseconomies of size.

Production is most often done with several variable inputs. To simplify presentation, however, only those that involve two variable inputs shall be considered.

An isoquant is “a curve or locus of points showing all possible combinations of inputs physically capable of producing a given level of output.”

PRODUCTION WITH TWO VARIABLE INPUTS

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