Production Factors, Costs, and Efficiency in Business
Quoted Rates of Productive Factors
Natural resources and land: Raw materials, energy, and various supplies that contribute to the product.
Labor: Manpower or the time spent by workers on the production of a good or service.
Capital: Company funds and all capital goods needed for production, including machine tools, production plants, premises, and buildings.
Technology
A specific or concrete way of combining production factors to produce a good or service.
R&D+i
Expenditure on research, innovation, and technology development.
- Research (R): Acquisition of new knowledge.
- Development (D): Application of research results.
- Innovation (i): Introduction of novelty.
Production Function
Lists the resources used in production.
q = f(L, K)
Productivity, Performance, and Product Environment
Product: Relates to the amount of inputs used.
Performance (or Total Product): Relates to the effect of production and the amount of factors used.
Average Product: Product per unit of labor.
Total Production and Rate of Change
Total Production: The relationship between the quantity produced and the inputs used.
(Value of Output) / (Inputs Used)
Rate of Variation: How production varies from one year to another.
(Final Quantity – Initial Quantity) / (Initial Quantity)
Components of Production Efficiency
Technical Efficiency and Economic Efficiency
Economic Efficiency of Technology
When a technology (A) can produce the same quantity of a product as another technology (B) using fewer units of production factors, or produce more products using the same quantity of production factors.
Marginal Cost
The increase in total cost when production increases by one unit.
MC = ΔCT / ΔQ
Direct and Indirect Costs
Direct Costs: Directly associated with production and can be assigned to each product.
Indirect Costs: Affect the production process, are generally common across various products, and cannot be directly assigned to a specific product.
Cost Components
Primary Cost: Raw materials, labor, and energy.
Industrial Cost: General and industrial costs (common production costs).
Cost of Activity or Exploitation: Marketing and administrative department costs.
Total Cost of the Company: Financial costs (cost of finance) of company investments and general corporate costs (management, promotion, or maintenance costs).
Profitability Threshold or Break-Even Point
The minimum quantity of products a company must sell for revenue to equal total production costs.
Deduction:
q* = (Cf) / (p – AVC)
Threshold Quantity vs. Threshold Income
Threshold Quantity: The minimum number of units a company must produce to recover its full production costs.
Threshold Income: The minimum amount a company must sell for the proceeds to match total production costs.
Law of Diminishing Returns
As the quantity of variable productive factors used increases, the marginal returns become smaller.
Production Concept
The creation of products (goods and services) from basic productive resources (T, L, K) by companies, aiming to satisfy the consumption needs of families.
Fixed and Variable Production Factors
Fixed Production Factor: Materials essential for a company’s production, e.g., water in a factory.
Variable Production Factor: Materials that can vary in a company’s production, e.g., glass or plastic bottles in a factory.
Fixed and Variable Costs
Fixed Costs: Costs that are independent of the production level and do not change if the quantity produced changes.
Variable Costs: Costs that are proportional to the production level and change with production factors (raw materials, labor, energy consumption).