productive resources used to produce final products Production
In technical terms,
Production = the creation of utility or creation
of want-satisfying goods and services.
Any good become useful for us or satisfies our
want when it is worth consumption. Utility • a good can be made useful by adding utility. For instance, we cannot consume “wheat flour” raw when we are hungry (want), unless it is turned into bread (output).
• This conversion of wheat flour into bread is
the process of creating utility 1) By changing form or shape and size of a good.
2) Using the scarce goods and
Utility services in proper time when they creation are most required. 3) By transferring a good from one place to another where its use is worthwhile. Utility creation
Production is the process of
adding utility to a good through: 1. Form utility,
2. Place utility,
3. Time utility. Production Function
the production function is name given to the
relationship between the rates of input of productive services and the rate of output of product.
(According to Stigler) Production Function
Where: stands for output, …. are the productive resources refers to function. Thus, is the function of which means depends upon Production Function Objective
a production function shows the
maximum amount of output that can be produced from a given set of inputs in the existing state of technology. • Fixed costs (FC): are those that do not vary with output and typically include rents, Fixed costs insurance, and set-up costs,.
• called also overheads or indirect costs.
• Variable costs (VC): are costs that do vary with output, and they are
• called also direct costs.
variable costs • Examples of typical variable costs include fuel, raw materials, packaging, and some labor costs (labor directly involved in a company's manufacturing process). • Total fixed costs (TFC): The total fixed costs are constant as output increases; the curve is a horizontal Total Fixed and line on the cost graph. variable costs • Total variable costs (TVC): The total variable cost (TVC) curve slopes up at an accelerating rate. • Total costs (TC): The total cost (TC) curve is found by adding total fixed and total variable costs. Total costs • Its position reflects the amount of fixed costs, and its gradient reflects variable costs. • Average fixed costs (AFC): Average fixed costs are found by dividing total Average fixed costs by output. Fixed Costs • As fixed cost is divided by an increasing output, average fixed costs will continue to decrease. Average variable costs (AVC): Average Average variable costs are found by dividing total Variable Costs variable costs by output. Average Total costs (ATC): Average total costs Average are found by dividing total costs by output. Total Costs Fixed and Variable Costs Example: Consider the following hypothetical example of a boat building firm. The total fixed costs, TFC, Fixed and needed to construct boats, are £100, Total variable costs (TVC) will increase as output variable costs increases as shown in the Attached table. Output Total fixed cost Total variable cost Total cost 0 100 0 100 1 100 50 150 2 100 80 180 3 100 100 200 4 100 110 210 5 100 150 250 6 100 220 320 7 100 350 450 8 100 640 740 Fixed and variable costs Example: If you know that with 10 units of output, average fixed cost is $15 and Fixed and average variable cost is $81, Calculate variable total cost at this output level is: costs Q= $10 AFC= $15 AVC= $81
TC @ 10 units = ? Example: If you know that with 10 units of output, average fixed cost is $15 and average variable cost is $81, then total cost at this Fixed and output level is: variable Q=10 AFC=15 AVC=81 TC @ 10 units = ? costs Example: If you know that with 10 units of output, average fixed cost is $15 and average variable cost is $81, then total cost at this Fixed and output level is: variable Q=10 AFC=15 AVC=81 TC @ 10 units = ? costs Example: With fixed costs of $500, a firm has average total costs of $5 and average variable costs of $3. Its output is:
Fixed and variable costs Total Fixed Total Variable Total Cost Output Cost (£000) Cost (£000) (£000) 1 100 50 150
2 100 80 180 Total Fixed 3 100 100 200 and variable 4 100 110 210
costs 5 100 150 250
6 100 220 320
7 100 350 450
8 100 640 740
Total Fixed Cost Average Fixed Cost Output (£000) (£000)
and variable AVC costs AFC Factors affecting costs of production
• Wage costs: For labor intensive industry (service sector/manufacturing of
clothes) a small change in wage costs has a big impact on overall costs of firms.
• Labor productivity: New technology which improves output per worker
enables the firm to cut back on employing workers, leading to lower costs. Factors affecting costs of production
• Exchange rate: A rise in the exchange rate makes imports cheaper. If
the firm needs to import raw materials, an appreciation can reduce the cost of production.
• Raw materials: A rise in the cost of raw materials, e.g., oil, plastic, and metal – will increase the cost of firms Factors affecting costs of production
• Transport costs
• Interest rates: Firms who borrowed to invest will be affected by an
increase in interest rates – which raises the cost of loan repayments.
