Production: Inputs and Outputs

• Production is the combination of inputs to create an output for consumption, contributing to individuals' utility.

Inputs

• Economic resources used in the production of goods and services.
• The four basic inputs are labor, capital, land, and entrepreneurial ability.

Outputs

• Inputs transformed into a final usable form, providing more satisfaction to the consumer.
• Outputs are consequences of the production process.
• Tangible Outputs: Physical products with long-term physical existence (e.g., buildings, machinery, cars).
• Intangible Outputs: Non-physical products without physical existence (e.g., insurance, consultancy, software, training, healthcare).

Types of Inputs

• Fixed Inputs: Quantity cannot be varied during the period under consideration (e.g., buildings, machinery).
• Variable Inputs: Quantity can be changed during the period under consideration (e.g., raw materials, labor).

Periods of Production

• Classification based on the flexibility of economic resources to changes in the business environment.
• Short Run: A period where at least one input is fixed while the others are variable.
  • Output increase can be achieved by increasing variable inputs.
• Long Run: A period where all inputs are variable (no fixed inputs).
  • Firms can change the size of the plant.
• Short run and long run do not refer to specific time periods, but rather to the economic arrangement of inputs.

Total Product (TP)

• The overall amount of output produced by the factors of production employed over a given period.
• The gross output is expressed in quantity (Q).

Average Product (AP)

• Calculated by dividing the total output by the number of workers employed: AP = TP/L.
• A good indicator of labor productivity.
• Productivity measures output per unit input.

Marginal Product (MP)

• The increase in output resulting from using one additional unit of a single factor input, holding other factors constant: MP = ΔTP/ΔL.
• ΔTP represents the change in total production and ΔL represents the change in labor input.
• Total Product, Marginal Product, and Average Product are interrelated.

Cost of Production

• Monetary outlays associated with production activity, or total expenditures and sacrifices made in the production and distribution of goods and services.

Explicit Costs

• Actual monetary payments or cash outlays made to outside suppliers of inputs or resources.
• Also known as "accounting costs" or out-of-pocket costs.

Implicit Costs

• Costs representing the values of non-purchased resources owned and used by firms in their production activities.
• Includes costs of firms’ own and self-employed resources, such as owner-manager salaries or estimated rent for owner-occupied buildings.
• Values are estimated based on what the resources could earn in their best alternative uses.

Economic Cost

• The sum of implicit costs and explicit costs.

Accounting Cost

• The monetary value of all purchased inputs used in production.
• Ignores the cost of non-purchased (self-owned) inputs.
• Considers direct expenses like wages, raw materials, depreciation, interest, and utility expenses.

Fixed Costs

• Costs that do not vary with the level of output.
• Incurred even if the firm does not produce anything.
• Examples include rents, interest, and wear and tear of machinery.

Variable Costs

• Costs that directly vary with the level of output.
• Zero when output is zero and rise as output expands.
• Examples include wages of workers (excluding administrative staff) and raw material costs.

Total Cost (TC)

• The sum of total fixed cost (TFC) and total variable cost (TVC): TC = TFC + TVC.

Average Total Cost (ATC)

• Total cost per unit output: ATC = TC/Q.
• Can be divided into average variable cost (AVC) and average fixed cost (AFC).
• ATC = AFC + AVC, where AFC = TFC/Q and AVC = TVC/Q.

Marginal Cost (MC)

• The extra or additional total cost resulting from producing one more unit of output: MC = ΔTC/ΔQ or MC = ΔTVC/ΔQ in the short run (when ΔTFC = 0).