Production and Cost of the firm with curves

Production and Cost of the firm with curves

1. Production & Cost Dr. Arifa Saeed

2. Production Process Production  is a  process  of combining various material inputs and immaterial inputs (plans, know-how) in order to make something for consumption (output). It is the act of creating an output, a good or service which has value and contributes to the utility of individuals.

3. 3 sector hypothesis Primary industry: The primary sector includes all those activities the end purpose of which consists in exploiting natural resources: agriculture, fishing, forestry, mining, deposits. Secondary industry: A secondary industry is an industry that takes raw materials as input and creates finished products as output. This can be contrasted with primary industries that produce raw materials and tertiary industries that produce services. A large secondary industry is characteristic of an industrial economy.

4. Tertiary industry: the part of a country's economy concerned with the provision of services. Examples of tertiary industries may include: Telecommunication. Hospitality  industry /tourism. Mass media. Healthcare/hospitals. Public health. Pharmacy. Information technology.

5. Less developed countries (LDCs) Primary > secondary > tertiary Less-developed countries (LDC) are low-income countries that face significant structural challenges to sustainable development. The United Nations' list of LDCs currently comprises 47 countries.

6. developed countries (DCs) Teritary > secondary > primary developed economy is typically characteristic of a developed country with a relatively high level of economic growth and security. Standard criteria for evaluating a country's level of development are  income per capita  or per capita gross domestic product, the level of industrialization, the general  standard of living , and the amount of technological infrastructure.

7. Production Time Momentary time period: a time period during which a firm is unable to alter its factors of production, in response to the change in the demand and price of the product. During this time period supply is fixed and inelastic Short-run time period: a time period during which at least one factor of production is fixed. Here labor is usually a variable factor where as capital and land are fixed.

8. long-run time period: a time period during which a firm is able to change all its factors of production, there is no change in techniques of production or no change in technology. Very long-run time period: a time period during which a firm is able to change all its factors of production along with the techniques of production or technology.

9. labor-intensive & capital-intensive production Every firm required a different combination of factors of production. Some are labor intensive and some are capital intensive. Labor Intensive: These firms deployed a higher proportion of labor as compared to other factors of production. Example: Traditional agriculture, Teaching, Psychiatry, film making, etc. The cost of labor intensive products can be high since specialist labor is being developed.  Capital Intensive: These firms deployed a higher proportion of capital as compared to other factor of production. Example: Car manufacturing, aircraft manufacturing, oil production etc. Capital intensive firms invest in automated machinery, CAD and CAM, tools etc. which can be costly in the start however in the long rub can lead to reduction in average costs due to technological economies of scale. These firms tend to produce standardized products in mass quantity which helps lower the per unit costs.

10. Factors that affect the choice of labor vs capital intensive Factor Description Cost of Labor vs Capital The Factor the lowest cost would be chosen assuming that labor and capital can both perform the same risk Size of the Market If size of the market is large firms usually prefer capital intensive. Example Coke. If the Size of the market is small or deals with personalized services then it would be more labor intensive. Example: Teaching. Firm’s Objective If the Objective is to maximize profits firms would tend to use capital intensive, however if the objective is social welfare might be labor intensive to keep jobs.

11. production and productivity Production: Is the total output of goods and services in the production process. It can be increased by mote factors of production or higher productivity of existing resources. Production = Factors of Production + Productivity  Productivity: It describe how efficiently are inputs converted into outputs. It is the measure of efficiency. This can be calculated in two ways, Labor productivity and Capital Productivity. Labor Productivity can be enhanced by employing few but skilled labor and capital productivity can be enhanced by deploying technologically advanced machinery. Productivity can be calculated using the following formulas: Labor Productivity = ________ Total Output_________ Average number of worker Capital Productivity = ________ Total Output_________ Capital Employed  

12. Advantages Description Economies of Scale This when by increase the scale of production average cost per unit decreases. Lower costs can reduce price and increase company profits. Higher Profits Profit earned due to low cost can be reinvested in training workers, hiring efficient staff and investing in superior technology and research. This gives the firm a competitive edge over competitive edge over competitors and improves the quality of goods being produced. Improve competitiveness This help the firm build a competitive edge over competitors. More efficient firms can dump their products in other countries to take down competition. Economic Growth As discussed earlier in section 1 a country’s PPC shifts outwards if the productivity increase. This can help the country achieve a point of PPC which was previously not achievable. This can increase employment, Improve standard of living, and can generate more taxes for the government. Advantages of High productivity to an economy?

13. Determinants of Productivity Factor Description Investment If a firm invests more in high tech machinery and technology productivity will go up. However, this is only possible if interest rate is low because borrowing is cheaper. Innovation This includes both product and process innovation. This includes developing better technology like emails to make work and communication cheap and less time consuming Skills and experience If the skills of a labor are improved this improves his quality of work. This can be achieved by better training. Entrepreneurial Sprit Entrepreneurs tend to invest in new technologies and create innovative products in pursuit of profits. More the willingness the more productive the system gets. Competition If the competition in the market is high every firms will tend to reduce operation costs and tend to innovate to stay ahead of the competition. This improves the overall innovation and helps boost the overall productivity.

14. costs, revenues and profits Arifa Saeed

15. Cost Costs are all expenses and payments in the production process. Example: paying salaries, payments rent, paying taxes etc. Costs can be categorized in FOUR ways: Fixed Costs Variables Costs Total Costs Average Costs Average Fixed Cost

16. Fixed Costs (FC) It is the part of total cost which does not vary with the output and will incur even at zero output level. Example: Rent, interest on loan, Staff salary, license fees etc. As we see from the diagram above, graphically fixed cost curve is horizontal or parallel to the x- a xis

17. Variable Cost It is the part of total cost which does varies with the output and fall to zero when output is zero. Example: Cost of raw material, wages, and transportation.  As we see from the diagram above, graphically the variable cost curve: Always originate frim zero Is upward sloping and Is parallel to the total cost curve

18. Total cost It is the sum of all fixed and variable costs on the production process.  Total Cost = Fixed Cost + Variable Cost

19. Average Cost It is the total cost per unit of output. In other words, it is the cost of making one product. When the firm experiences “economies of scale” the average cost decrease and when the firm experiences “diseconomies of scale” the average cost increase. Average Cost = Total Cost_________ Total Output

20. Average Cost Example: TC = $5000 Q = 100 AC = 5000/100 = $5/unit As we see from the diagram above, graphically the AC curve falls with the rise in output (From point a to b). At b the average cost it is minimum and after b the AC rises with the increase in output. The reason for this is that with an increase in production average fixed cost decreases continuously however average variable decreases till a certain point after which it starts to increase.

21. AverageFixedCost It is the total cost divided by output. As the output increases the cost decreases  AFC = -------- FixedOutput _________ Total Output

22. Function of cost Helps in profit and Loss Calculation Helps managers in taking decisions Helps in calculating total cost Nature of the cost can help in planning

23. revenues It is the money that a business receives from the sale of goods and services It is also known as sales revenue, sales turnover or Total Revenue. Sales Revenue = Price x Quantity Sold Example: Selling price per unit = $2 Unit Sold = 1000 Sales Revenue / Total Revenue / $2000

24. REVENUE As we see from the diagram above, graphically the Total Revenue curve: Originates from zero and is upward slopping TR should not be confused with Variable Cost curve. Both of them have same shape however VC is parallel to TC whereas TR cuts TC. 

25. It is the total revenue per unit output sold. In other words, it is the revenue earned from sale of one unit. This is also known as the average price of a good.  Average Revenue = ________ Total Revenue_________ Total Output Example: Total Revenue = $10,000 Unit Sold = 1000 Average Revenue = 10,000 / 1000 = $10 

26. profit and break-even Profit Definition: It is a point where TR becomes equal to TC. A break-even chart gives the graphical representation of profit. Beyond the break-even point the company makes a profit, below the break-even company makes a loss. On the break-even no profit, no loss.   Profit = Total Revenue – Total Costs

27. profit and break-even Break Even Definition: It is a point where TR becomes equal to TC. A break-even chart gives the graphical representation of profit and losses and should always be nake in the exam to illustrate the concept of profit. Beyond the break-even point the company makes a profit, below the break-even company makes a loss. On the break-even no profit, no loss.

28. profit and break-even As we see from the above diagram all points ahead of “1000” will generate a profit since TR>TC. However, any point behind “1000” will generate a loss, The area of profit is shown by the shaded region after point “1000” and the area of loss is the shaded region behind point “1000”   Profit = TR>TC L oss = TR<TC Break-Even = TR = TC  

29. business objectives Corporate objectives are those that relate to the business as a whole. They are usually set by the Top management of the business and they provide the focus for setting more detailed objectives for the main functional activities of the business.  

30. Objective Description Profit Maximization This is when business try to maximize the different between its cost and revenues. They help the business grow and persuade business owners to take risks. It can also be regarded as the point where Marginal Cost = Marginal Revenue. Growth This aims to maximize sales and value of output. This helps the firm earn economics of scale, these firms enjoy greater control over the market and motivates managers to work hard. Increase Market Share This is the ration between the sales of the company and the sales industry. Higher the market share, the larger the business. Market Share % = Company Sales x 100 Total Market Share Survival This is usually an objective for newly established business. Here the business aims to stay in the market and just cover it costs. Corporate Social Responsibility This objective is set by businesses that consider the interest of their stakeholders and not only their shareholders when taking decisions. These company’s give better treatment to workers, customers, environment etc. Image and Reputation These companies tend to portray themselves in a positive light in front if their stakeholders. Example: Welfare campaigns, call backs in case of potential problems etc.