Understanding Production: Factors, Processes, and Profitability
1. Defining Production: Different Perspectives
From an economic point of view: Production is the development of products (goods and services) from basic productive resources (natural resources, labor, capital) by companies (economic units of production) in order to be purchased or consumed by families.
From a technical perspective: Production is a combination of several elements: labor, raw materials, machinery, energy, technical direction, etc. (production factors), which follow a series of procedures defined previously (technology) in order to obtain goods and services (product).
From a functional and utilitarian perspective: Production is a process by which added value is added to things, creating useful goods; that is, value is being added.
2. Factors of Production
- Natural resources: These are raw materials, energy supplies, and other materials that make up the product.
- Labor: This is the manpower or time that workers devote to the production of a good or service.
- Capital: This refers not only to the financial resources of the company but also includes a set of capital goods needed for production: machinery, tools, production facilities, premises, and buildings.
Business organization (management and administration of the factors by the company or employer) can also be a factor of production. The combination of various factors of production produces a product.
3. Production Process
The production process is the global system that characterizes a productive activity, which can be outlined as follows:
There are several ways of classifying production processes based on various criteria:
- Based on the time horizon, that is, considering how much the weather influences the production process.
- Depending on the used-productive, that is, depending on the relationship between labor and machinery.
- According to the obtained product differentiation, that is, taking into account if there are equal products or products with some degree of differentiation.
4. Defining the Break-Even Point or Threshold of Profitability
You can define the threshold of profitability of the company or the break-even point as the amount of production sold from which the company begins to make profits. Also called the balance point.
The benefit of a company is the difference between revenue and total costs:
Bf = IT – TC
The income of the company is the amount of sales made:
IT = PS Q
Where p is the unit price of the product and Q the number of units sold;
CT = CF + CV or also CT = CF + Cvu Q
Where Cvu represents the variable cost unit.
To find the impasse, we find the number of units sold, making profits equal to 0, that is, the amount at which total revenues equal total costs:
Bf = 0 IT = TC and therefore PS Q = CF + Q Cvu
If we represent the Q obtained from this equality, that is, the impasse by Q *, is:
CFP-Q *= Cvu
5. Externalities and Social Costs of Production
When a company manufactures a product, it generates a cost structure associated with the use of productive factors that are assumed internally and tries to retrieve a certain profit margin. In this case, these are internal costs. But in many cases, productive activities lead to effects and costs not included in the cost structure of the company. These are external costs and social costs of production due to the existence of negative externalities (pollution, noise, etc.). On the other hand, there are positive externalities, that is, benefits to other companies or individuals as a result of the exercise of economic activity.
The negative social costs of production do not lie with the company or its products on consumers but on the whole of society.
Therefore, one must begin to solve the problems of pollution and inadequate protection of the environment with the inclusion of these social costs in the productive structure of the company.