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Production and Cost - Coggle Diagram
Production and Cost
Production
Production Decisions
Firms have to make a range of productions decisions in order to be efficient, profitable and competitive
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Objectives, Constraints and Efficiency
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to achieve this objective and optimise the overall efficiency, a business needs to overcome a number of constraints such as those regarding the economic and institutional environment
firms also have to consider potential market constraints, such as the customers’ willingness to pay, competitors’ prices, and the prices of resources
Factors of Production
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Firms produce outputs (products and services), using various combinations of factors of production.
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Includes
1 Capital services (K), such as machines, buildings, and vehicles
2 Labour services (L): such as management, professionals, skilled and unskilled workers
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4 Materials: such as the raw inputs (oil, water, minerals); processed product inputs (components, chemicals)
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Measures of Productivity
Productivity measures how efficiently production inputs are being used in an economy to produce a given level of output
In the workplace, productivity refers to the output per unit of input
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Cost
Review of Cost Concepts
Economic Cost: The value ascribed to any input or resource, whether tangible such as machinery and labour, or intangible like time, used in the creation of a product or provision of a service.
Costs in Factor or Input Markets: These represent the prices of resources such as raw materials, labour, or machinery when they are bought or used for production.
Explicit Costs: Direct financial expenditures by a business or individual for goods, services, or resources. They are clear, out-of-pocket expenses, such as wages paid to employees or rent for office space.
Implicit Costs: These are not directly tied to clear financial transactions but represent the value of an opportunity foregone in favour of another option. For example, the salary a business owner could have earned elsewhere, rather than investing time in their own business.
Opportunity Costs: The cost of the next best alternative use of a resource or input. It represents the benefits you could have received by taking an alternative action. All economic costs consider these lost opportunities in their calculation.
Cost Minimisation: A primary objective for many firms, this refers to strategies or measures taken to reduce costs to the lowest possible level without compromising on the quality or quantity of output.
Costs, in various forms, influence almost every strategic move a company makes. From investments in production to setting price points and determining profitability, the nature and type of costs play a pivotal role.
Types of Costs
Fixed costs remain constant regardless of the level of output,
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Marginal cost refers to the change in total cost, or specifically total variable cost, resulting from a one-unit increase in output
sunk costs, which are expenditures that have already been incurred and cannot be recouped
short-run total costs come into play in scenarios where the quantities of one or more production factors remain fixed
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long-run total costs account for periods when the quantities of all production factors can be adjusted
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Introduction
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While costs are universally recognised as the expenditure for producing a product or service, there is an array of classifications and nuances that differentiate one type of cost from another
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