SlideShare a Scribd company logo
Production & Cost
Dr. Arifa Saeed
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 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.
• 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.
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.
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.
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.
• 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.
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.
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.
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
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?
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.
COSTS, REVENUES AND
PROFITS
Arifa Saeed
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:
1. Fixed Costs
2. Variables Costs
3. Total Costs
4. Average Costs
5. Average Fixed Cost
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- axis
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:
1. Always originate frim zero
2. Is upward sloping and
3. Is parallel to the total cost curve
Total cost
• It is the sum of all fixed and
variable costs on the
production process.
• Total Cost = Fixed Cost +
Variable Cost
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
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.
AverageFixedCost
• It is the total cost divided by output. As the
output increases the cost decreases
• AFC = -------- FixedOutput_________
• Total Output
Function of cost
1. Helps in profit and Loss Calculation
2. Helps managers in taking decisions
3. Helps in calculating total cost
4. Nature of the cost can help in planning
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
REVENUE
• As we see from the diagram above,
graphically the Total Revenue curve:
1. Originates from zero and is upward slopping
2. 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.
• 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
PROFIT AND BREAK-EVEN
1. 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
PROFIT AND BREAK-EVEN
1. 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.
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
• Loss = TR<TC
• Break-Even = TR = TC
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.
Objective Description
1. 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.
1. 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.
1. 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
1. Survival This is usually an objective for newly established business. Here the business aims
to stay in the market and just cover it costs.
1. 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.
1. 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.

More Related Content

Similar to Production and Cost of the firm with curves

ARKA RAJ SAHA 27332020003.....pdf
ARKA RAJ SAHA 27332020003.....pdfARKA RAJ SAHA 27332020003.....pdf
ARKA RAJ SAHA 27332020003.....pdf
ARKARAJSAHA
 
CHAPTER 3- COSTING AND PRICING.pptx
CHAPTER 3- COSTING AND PRICING.pptxCHAPTER 3- COSTING AND PRICING.pptx
CHAPTER 3- COSTING AND PRICING.pptx
Finn91108
 
EE&FA/C - ECONOMICS OF SCALE - FINAL YEAR CS/ 3RD YEAR IT - SRI SAIRAM INSTIT...
EE&FA/C - ECONOMICS OF SCALE - FINAL YEAR CS/ 3RD YEAR IT - SRI SAIRAM INSTIT...EE&FA/C - ECONOMICS OF SCALE - FINAL YEAR CS/ 3RD YEAR IT - SRI SAIRAM INSTIT...
EE&FA/C - ECONOMICS OF SCALE - FINAL YEAR CS/ 3RD YEAR IT - SRI SAIRAM INSTIT...
SRI SAIRAM INSTITUTE OF TECHNOLOGY, CHENNAI
 
Life cycle costing and customer life cycle costing (cost accounting)
Life cycle costing and customer life cycle costing (cost accounting)Life cycle costing and customer life cycle costing (cost accounting)
Life cycle costing and customer life cycle costing (cost accounting)
Ro'ya Abd Elhafez
 
The Production Process and Control
The Production Process and ControlThe Production Process and Control
The Production Process and Control
Joevie Bertillo
 
Relation between production and cost
Relation between production and costRelation between production and cost
Relation between production and cost
Chhavi Bhatt
 
Cost market & competitive analysis
Cost market & competitive analysisCost market & competitive analysis
Cost market & competitive analysis
Anupam Ghosh
 
Cost and BEA
Cost and BEACost and BEA
Cost and BEA
Preet_patel
 
Cost Accounting Study material - Unit I.docx
Cost Accounting Study material - Unit I.docxCost Accounting Study material - Unit I.docx
Cost Accounting Study material - Unit I.docx
DrSJayashree
 
MODULE 4 Managerial Economics.pptx
MODULE 4 Managerial Economics.pptxMODULE 4 Managerial Economics.pptx
MODULE 4 Managerial Economics.pptx
ssuserff5cd7
 
economics ppt for btech and basic introduction to engineering
economics ppt for btech and basic introduction to engineeringeconomics ppt for btech and basic introduction to engineering
economics ppt for btech and basic introduction to engineering
CITDiplomaMadhyamgra
 
Costs of Production
Costs of ProductionCosts of Production
Costs of Production
Dr. Shweta Uppadhyay
 
Cost theory
Cost theoryCost theory
Cost theory
SAMINAKHAN72
 
Labour and capital intensive
Labour and capital intensiveLabour and capital intensive
Labour and capital intensive
nawin12
 
Costs Of Production Micro Economics ECO101
Costs Of Production Micro Economics ECO101Costs Of Production Micro Economics ECO101
Costs Of Production Micro Economics ECO101
Sabih Kamran
 
Production Cost Concepts (ppt)
Production Cost Concepts (ppt) Production Cost Concepts (ppt)
Production Cost Concepts (ppt)
Priyanshu
 
The Price System (supplement)
The Price System (supplement)The Price System (supplement)
The Price System (supplement)
Kalaiyarasi Danabalan
 
Law of Variable Proportions and Law of Returns to Scale
Law of Variable Proportions and Law of Returns to ScaleLaw of Variable Proportions and Law of Returns to Scale
Law of Variable Proportions and Law of Returns to Scale
Ayush Parekh
 
COST ANALYSIS (CBCS SYLLABUS)
COST ANALYSIS (CBCS SYLLABUS)COST ANALYSIS (CBCS SYLLABUS)
COST ANALYSIS (CBCS SYLLABUS)
AbhiramiGangadharan
 
Fundamental economic concepts used in business decisions
Fundamental economic concepts used in business decisionsFundamental economic concepts used in business decisions
Fundamental economic concepts used in business decisions
Zainul Lamak
 

Similar to Production and Cost of the firm with curves (20)

ARKA RAJ SAHA 27332020003.....pdf
ARKA RAJ SAHA 27332020003.....pdfARKA RAJ SAHA 27332020003.....pdf
ARKA RAJ SAHA 27332020003.....pdf
 
CHAPTER 3- COSTING AND PRICING.pptx
CHAPTER 3- COSTING AND PRICING.pptxCHAPTER 3- COSTING AND PRICING.pptx
CHAPTER 3- COSTING AND PRICING.pptx
 
EE&FA/C - ECONOMICS OF SCALE - FINAL YEAR CS/ 3RD YEAR IT - SRI SAIRAM INSTIT...
EE&FA/C - ECONOMICS OF SCALE - FINAL YEAR CS/ 3RD YEAR IT - SRI SAIRAM INSTIT...EE&FA/C - ECONOMICS OF SCALE - FINAL YEAR CS/ 3RD YEAR IT - SRI SAIRAM INSTIT...
EE&FA/C - ECONOMICS OF SCALE - FINAL YEAR CS/ 3RD YEAR IT - SRI SAIRAM INSTIT...
 
Life cycle costing and customer life cycle costing (cost accounting)
Life cycle costing and customer life cycle costing (cost accounting)Life cycle costing and customer life cycle costing (cost accounting)
Life cycle costing and customer life cycle costing (cost accounting)
 
The Production Process and Control
The Production Process and ControlThe Production Process and Control
The Production Process and Control
 
Relation between production and cost
Relation between production and costRelation between production and cost
Relation between production and cost
 
Cost market & competitive analysis
Cost market & competitive analysisCost market & competitive analysis
Cost market & competitive analysis
 
Cost and BEA
Cost and BEACost and BEA
Cost and BEA
 
Cost Accounting Study material - Unit I.docx
Cost Accounting Study material - Unit I.docxCost Accounting Study material - Unit I.docx
Cost Accounting Study material - Unit I.docx
 
MODULE 4 Managerial Economics.pptx
MODULE 4 Managerial Economics.pptxMODULE 4 Managerial Economics.pptx
MODULE 4 Managerial Economics.pptx
 
economics ppt for btech and basic introduction to engineering
economics ppt for btech and basic introduction to engineeringeconomics ppt for btech and basic introduction to engineering
economics ppt for btech and basic introduction to engineering
 
Costs of Production
Costs of ProductionCosts of Production
Costs of Production
 
Cost theory
Cost theoryCost theory
Cost theory
 
Labour and capital intensive
Labour and capital intensiveLabour and capital intensive
Labour and capital intensive
 
Costs Of Production Micro Economics ECO101
Costs Of Production Micro Economics ECO101Costs Of Production Micro Economics ECO101
Costs Of Production Micro Economics ECO101
 
Production Cost Concepts (ppt)
Production Cost Concepts (ppt) Production Cost Concepts (ppt)
Production Cost Concepts (ppt)
 
The Price System (supplement)
The Price System (supplement)The Price System (supplement)
The Price System (supplement)
 
Law of Variable Proportions and Law of Returns to Scale
Law of Variable Proportions and Law of Returns to ScaleLaw of Variable Proportions and Law of Returns to Scale
Law of Variable Proportions and Law of Returns to Scale
 
COST ANALYSIS (CBCS SYLLABUS)
COST ANALYSIS (CBCS SYLLABUS)COST ANALYSIS (CBCS SYLLABUS)
COST ANALYSIS (CBCS SYLLABUS)
 
Fundamental economic concepts used in business decisions
Fundamental economic concepts used in business decisionsFundamental economic concepts used in business decisions
Fundamental economic concepts used in business decisions
 

More from Dr. Arifa Saeed

Macro economics , George Mankiwchapter, 7- Economic Growth I: Capital Accu...
Macro economics ,  George Mankiwchapter, 7- Economic Growth I:  Capital Accu...Macro economics ,  George Mankiwchapter, 7- Economic Growth I:  Capital Accu...
Macro economics , George Mankiwchapter, 7- Economic Growth I: Capital Accu...
Dr. Arifa Saeed
 
Macro economics, George Mankiw, 6- unemployment
Macro economics, George Mankiw, 6- unemploymentMacro economics, George Mankiw, 6- unemployment
Macro economics, George Mankiw, 6- unemployment
Dr. Arifa Saeed
 
Macro economics, George Mankiw, 5- Open economy
Macro economics, George Mankiw, 5- Open economyMacro economics, George Mankiw, 5- Open economy
Macro economics, George Mankiw, 5- Open economy
Dr. Arifa Saeed
 
Macro economics, George Mankiw, 4- Money & inflation
Macro economics, George Mankiw, 4- Money & inflationMacro economics, George Mankiw, 4- Money & inflation
Macro economics, George Mankiw, 4- Money & inflation
Dr. Arifa Saeed
 
Macro economics, George Mankiw, 3- National income: where it comes from & whe...
Macro economics, George Mankiw, 3- National income: where it comes from & whe...Macro economics, George Mankiw, 3- National income: where it comes from & whe...
Macro economics, George Mankiw, 3- National income: where it comes from & whe...
Dr. Arifa Saeed
 
International economics – 2 classical theories of IT
International economics – 2 classical theories of ITInternational economics – 2 classical theories of IT
International economics – 2 classical theories of IT
Dr. Arifa Saeed
 
international economics - introduction - 1.ppt
international economics - introduction - 1.pptinternational economics - introduction - 1.ppt
international economics - introduction - 1.ppt
Dr. Arifa Saeed
 
Understanding China(International Trade-Chinese Model of development-Export l...
Understanding China(International Trade-Chinese Model of development-Export l...Understanding China(International Trade-Chinese Model of development-Export l...
Understanding China(International Trade-Chinese Model of development-Export l...
Dr. Arifa Saeed
 
the model of the perfect competition.ppt
the model of the perfect competition.pptthe model of the perfect competition.ppt
the model of the perfect competition.ppt
Dr. Arifa Saeed
 
indifference curve analysis: ordinal approach theory.pptx
indifference curve analysis: ordinal approach theory.pptxindifference curve analysis: ordinal approach theory.pptx
indifference curve analysis: ordinal approach theory.pptx
Dr. Arifa Saeed
 
Washington consensus and its important points with respect to pakistan
Washington consensus and its important points with respect to pakistanWashington consensus and its important points with respect to pakistan
Washington consensus and its important points with respect to pakistan
Dr. Arifa Saeed
 
Macro economics, G.mankiw, 1-The Science of Macroeconomics
Macro economics, G.mankiw, 1-The Science of MacroeconomicsMacro economics, G.mankiw, 1-The Science of Macroeconomics
Macro economics, G.mankiw, 1-The Science of Macroeconomics
Dr. Arifa Saeed
 
Macroeconomics, G.Mankiw, 2-data of Macroeconomics
Macroeconomics, G.Mankiw, 2-data of MacroeconomicsMacroeconomics, G.Mankiw, 2-data of Macroeconomics
Macroeconomics, G.Mankiw, 2-data of Macroeconomics
Dr. Arifa Saeed
 
THE ROLE OF IMF (INTERNATIONAL MONETORY FUND) PAKISTANI ECONOMY?
THE ROLE OF IMF (INTERNATIONAL MONETORY FUND) PAKISTANI ECONOMY?THE ROLE OF IMF (INTERNATIONAL MONETORY FUND) PAKISTANI ECONOMY?
THE ROLE OF IMF (INTERNATIONAL MONETORY FUND) PAKISTANI ECONOMY?
Dr. Arifa Saeed
 
demand supply and governmental policies.
demand supply and governmental policies.demand supply and governmental policies.
demand supply and governmental policies.
Dr. Arifa Saeed
 
the technology will destroy this world?.ppt
the technology will destroy this world?.pptthe technology will destroy this world?.ppt
the technology will destroy this world?.ppt
Dr. Arifa Saeed
 
Ulrich Beck Theory of Risky World (technoculture & risk)
Ulrich Beck Theory of Risky World (technoculture & risk)Ulrich Beck Theory of Risky World (technoculture & risk)
Ulrich Beck Theory of Risky World (technoculture & risk)
Dr. Arifa Saeed
 
classical theories of international trade.pptx
classical theories of international trade.pptxclassical theories of international trade.pptx
classical theories of international trade.pptx
Dr. Arifa Saeed
 
international trade introduction - lecture 1
international trade introduction - lecture 1international trade introduction - lecture 1
international trade introduction - lecture 1
Dr. Arifa Saeed
 
utility cardinal theory in economics.ppt
utility cardinal theory in economics.pptutility cardinal theory in economics.ppt
utility cardinal theory in economics.ppt
Dr. Arifa Saeed
 

More from Dr. Arifa Saeed (20)

Macro economics , George Mankiwchapter, 7- Economic Growth I: Capital Accu...
Macro economics ,  George Mankiwchapter, 7- Economic Growth I:  Capital Accu...Macro economics ,  George Mankiwchapter, 7- Economic Growth I:  Capital Accu...
Macro economics , George Mankiwchapter, 7- Economic Growth I: Capital Accu...
 
Macro economics, George Mankiw, 6- unemployment
Macro economics, George Mankiw, 6- unemploymentMacro economics, George Mankiw, 6- unemployment
Macro economics, George Mankiw, 6- unemployment
 
Macro economics, George Mankiw, 5- Open economy
Macro economics, George Mankiw, 5- Open economyMacro economics, George Mankiw, 5- Open economy
Macro economics, George Mankiw, 5- Open economy
 
Macro economics, George Mankiw, 4- Money & inflation
Macro economics, George Mankiw, 4- Money & inflationMacro economics, George Mankiw, 4- Money & inflation
Macro economics, George Mankiw, 4- Money & inflation
 
Macro economics, George Mankiw, 3- National income: where it comes from & whe...
Macro economics, George Mankiw, 3- National income: where it comes from & whe...Macro economics, George Mankiw, 3- National income: where it comes from & whe...
Macro economics, George Mankiw, 3- National income: where it comes from & whe...
 
International economics – 2 classical theories of IT
International economics – 2 classical theories of ITInternational economics – 2 classical theories of IT
International economics – 2 classical theories of IT
 
international economics - introduction - 1.ppt
international economics - introduction - 1.pptinternational economics - introduction - 1.ppt
international economics - introduction - 1.ppt
 
Understanding China(International Trade-Chinese Model of development-Export l...
Understanding China(International Trade-Chinese Model of development-Export l...Understanding China(International Trade-Chinese Model of development-Export l...
Understanding China(International Trade-Chinese Model of development-Export l...
 
the model of the perfect competition.ppt
the model of the perfect competition.pptthe model of the perfect competition.ppt
the model of the perfect competition.ppt
 
indifference curve analysis: ordinal approach theory.pptx
indifference curve analysis: ordinal approach theory.pptxindifference curve analysis: ordinal approach theory.pptx
indifference curve analysis: ordinal approach theory.pptx
 
Washington consensus and its important points with respect to pakistan
Washington consensus and its important points with respect to pakistanWashington consensus and its important points with respect to pakistan
Washington consensus and its important points with respect to pakistan
 
Macro economics, G.mankiw, 1-The Science of Macroeconomics
Macro economics, G.mankiw, 1-The Science of MacroeconomicsMacro economics, G.mankiw, 1-The Science of Macroeconomics
Macro economics, G.mankiw, 1-The Science of Macroeconomics
 
Macroeconomics, G.Mankiw, 2-data of Macroeconomics
Macroeconomics, G.Mankiw, 2-data of MacroeconomicsMacroeconomics, G.Mankiw, 2-data of Macroeconomics
Macroeconomics, G.Mankiw, 2-data of Macroeconomics
 
THE ROLE OF IMF (INTERNATIONAL MONETORY FUND) PAKISTANI ECONOMY?
THE ROLE OF IMF (INTERNATIONAL MONETORY FUND) PAKISTANI ECONOMY?THE ROLE OF IMF (INTERNATIONAL MONETORY FUND) PAKISTANI ECONOMY?
THE ROLE OF IMF (INTERNATIONAL MONETORY FUND) PAKISTANI ECONOMY?
 
demand supply and governmental policies.
demand supply and governmental policies.demand supply and governmental policies.
demand supply and governmental policies.
 
the technology will destroy this world?.ppt
the technology will destroy this world?.pptthe technology will destroy this world?.ppt
the technology will destroy this world?.ppt
 
Ulrich Beck Theory of Risky World (technoculture & risk)
Ulrich Beck Theory of Risky World (technoculture & risk)Ulrich Beck Theory of Risky World (technoculture & risk)
Ulrich Beck Theory of Risky World (technoculture & risk)
 
classical theories of international trade.pptx
classical theories of international trade.pptxclassical theories of international trade.pptx
classical theories of international trade.pptx
 
international trade introduction - lecture 1
international trade introduction - lecture 1international trade introduction - lecture 1
international trade introduction - lecture 1
 
utility cardinal theory in economics.ppt
utility cardinal theory in economics.pptutility cardinal theory in economics.ppt
utility cardinal theory in economics.ppt
 

Recently uploaded

FCCS Basic Accounts Outline and Hierarchy.pptx
FCCS Basic Accounts Outline and Hierarchy.pptxFCCS Basic Accounts Outline and Hierarchy.pptx
FCCS Basic Accounts Outline and Hierarchy.pptx
nalamynandan
 
Tdasx: In-Depth Analysis of Cryptocurrency Giveaway Scams and Security Strate...
Tdasx: In-Depth Analysis of Cryptocurrency Giveaway Scams and Security Strate...Tdasx: In-Depth Analysis of Cryptocurrency Giveaway Scams and Security Strate...
Tdasx: In-Depth Analysis of Cryptocurrency Giveaway Scams and Security Strate...
bresciafarid233
 
一比一原版美国新罕布什尔大学(unh)毕业证学历认证真实可查
一比一原版美国新罕布什尔大学(unh)毕业证学历认证真实可查一比一原版美国新罕布什尔大学(unh)毕业证学历认证真实可查
一比一原版美国新罕布什尔大学(unh)毕业证学历认证真实可查
taqyea
 
Governor Olli Rehn: Inflation down and recovery supported by interest rate cu...
Governor Olli Rehn: Inflation down and recovery supported by interest rate cu...Governor Olli Rehn: Inflation down and recovery supported by interest rate cu...
Governor Olli Rehn: Inflation down and recovery supported by interest rate cu...
Suomen Pankki
 
TechnoXander Confirmation of Payee Product Pack 1.pdf
TechnoXander Confirmation of Payee Product Pack 1.pdfTechnoXander Confirmation of Payee Product Pack 1.pdf
TechnoXander Confirmation of Payee Product Pack 1.pdf
richardwellington119
 
Who Is Abhay Bhutada, MD of Poonawalla Fincorp
Who Is Abhay Bhutada, MD of Poonawalla FincorpWho Is Abhay Bhutada, MD of Poonawalla Fincorp
Who Is Abhay Bhutada, MD of Poonawalla Fincorp
beulahfernandes8
 
Discover the Future of Dogecoin with Our Comprehensive Guidance
Discover the Future of Dogecoin with Our Comprehensive GuidanceDiscover the Future of Dogecoin with Our Comprehensive Guidance
Discover the Future of Dogecoin with Our Comprehensive Guidance
36 Crypto
 
The state of welfare Resolution Foundation Event
The state of welfare Resolution Foundation EventThe state of welfare Resolution Foundation Event
The state of welfare Resolution Foundation Event
ResolutionFoundation
 
Initial Public Offering (IPO) Process.ppt
Initial Public Offering (IPO) Process.pptInitial Public Offering (IPO) Process.ppt
Initial Public Offering (IPO) Process.ppt
ribhi87
 
一比一原版(cwu毕业证书)美国中央华盛顿大学毕业证如何办理
一比一原版(cwu毕业证书)美国中央华盛顿大学毕业证如何办理一比一原版(cwu毕业证书)美国中央华盛顿大学毕业证如何办理
一比一原版(cwu毕业证书)美国中央华盛顿大学毕业证如何办理
asukqco
 
Accounting Information Systems (AIS).pptx
Accounting Information Systems (AIS).pptxAccounting Information Systems (AIS).pptx
Accounting Information Systems (AIS).pptx
TIZITAWMASRESHA
 
Independent Study - College of Wooster Research (2023-2024)
Independent Study - College of Wooster Research (2023-2024)Independent Study - College of Wooster Research (2023-2024)
Independent Study - College of Wooster Research (2023-2024)
AntoniaOwensDetwiler
 
How to Invest in Cryptocurrency for Beginners: A Complete Guide
How to Invest in Cryptocurrency for Beginners: A Complete GuideHow to Invest in Cryptocurrency for Beginners: A Complete Guide
How to Invest in Cryptocurrency for Beginners: A Complete Guide
Daniel
 
Importance of community participation in development projects.pdf
Importance of community participation in development projects.pdfImportance of community participation in development projects.pdf
Importance of community participation in development projects.pdf
krisretro1
 
International Sustainability Standards Board
International Sustainability Standards BoardInternational Sustainability Standards Board
International Sustainability Standards Board
Kumar Ramaiah
 
Fabular Frames and the Four Ratio Problem
Fabular Frames and the Four Ratio ProblemFabular Frames and the Four Ratio Problem
Fabular Frames and the Four Ratio Problem
Majid Iqbal
 
13 Jun 24 ILC Retirement Income Summit - slides.pptx
13 Jun 24 ILC Retirement Income Summit - slides.pptx13 Jun 24 ILC Retirement Income Summit - slides.pptx
13 Jun 24 ILC Retirement Income Summit - slides.pptx
ILC- UK
 
BIHC Briefing June 2024 from Bank+Insurance Hybrid Capital in association wit...
BIHC Briefing June 2024 from Bank+Insurance Hybrid Capital in association wit...BIHC Briefing June 2024 from Bank+Insurance Hybrid Capital in association wit...
BIHC Briefing June 2024 from Bank+Insurance Hybrid Capital in association wit...
Neil Day
 
University of North Carolina at Charlotte degree offer diploma Transcript
University of North Carolina at Charlotte degree offer diploma TranscriptUniversity of North Carolina at Charlotte degree offer diploma Transcript
University of North Carolina at Charlotte degree offer diploma Transcript
tscdzuip
 
The Impact of Generative AI and 4th Industrial Revolution
The Impact of Generative AI and 4th Industrial RevolutionThe Impact of Generative AI and 4th Industrial Revolution
The Impact of Generative AI and 4th Industrial Revolution
Paolo Maresca
 

Recently uploaded (20)

FCCS Basic Accounts Outline and Hierarchy.pptx
FCCS Basic Accounts Outline and Hierarchy.pptxFCCS Basic Accounts Outline and Hierarchy.pptx
FCCS Basic Accounts Outline and Hierarchy.pptx
 
Tdasx: In-Depth Analysis of Cryptocurrency Giveaway Scams and Security Strate...
Tdasx: In-Depth Analysis of Cryptocurrency Giveaway Scams and Security Strate...Tdasx: In-Depth Analysis of Cryptocurrency Giveaway Scams and Security Strate...
Tdasx: In-Depth Analysis of Cryptocurrency Giveaway Scams and Security Strate...
 
一比一原版美国新罕布什尔大学(unh)毕业证学历认证真实可查
一比一原版美国新罕布什尔大学(unh)毕业证学历认证真实可查一比一原版美国新罕布什尔大学(unh)毕业证学历认证真实可查
一比一原版美国新罕布什尔大学(unh)毕业证学历认证真实可查
 
Governor Olli Rehn: Inflation down and recovery supported by interest rate cu...
Governor Olli Rehn: Inflation down and recovery supported by interest rate cu...Governor Olli Rehn: Inflation down and recovery supported by interest rate cu...
Governor Olli Rehn: Inflation down and recovery supported by interest rate cu...
 
TechnoXander Confirmation of Payee Product Pack 1.pdf
TechnoXander Confirmation of Payee Product Pack 1.pdfTechnoXander Confirmation of Payee Product Pack 1.pdf
TechnoXander Confirmation of Payee Product Pack 1.pdf
 
Who Is Abhay Bhutada, MD of Poonawalla Fincorp
Who Is Abhay Bhutada, MD of Poonawalla FincorpWho Is Abhay Bhutada, MD of Poonawalla Fincorp
Who Is Abhay Bhutada, MD of Poonawalla Fincorp
 
Discover the Future of Dogecoin with Our Comprehensive Guidance
Discover the Future of Dogecoin with Our Comprehensive GuidanceDiscover the Future of Dogecoin with Our Comprehensive Guidance
Discover the Future of Dogecoin with Our Comprehensive Guidance
 
The state of welfare Resolution Foundation Event
The state of welfare Resolution Foundation EventThe state of welfare Resolution Foundation Event
The state of welfare Resolution Foundation Event
 
Initial Public Offering (IPO) Process.ppt
Initial Public Offering (IPO) Process.pptInitial Public Offering (IPO) Process.ppt
Initial Public Offering (IPO) Process.ppt
 
一比一原版(cwu毕业证书)美国中央华盛顿大学毕业证如何办理
一比一原版(cwu毕业证书)美国中央华盛顿大学毕业证如何办理一比一原版(cwu毕业证书)美国中央华盛顿大学毕业证如何办理
一比一原版(cwu毕业证书)美国中央华盛顿大学毕业证如何办理
 
Accounting Information Systems (AIS).pptx
Accounting Information Systems (AIS).pptxAccounting Information Systems (AIS).pptx
Accounting Information Systems (AIS).pptx
 
Independent Study - College of Wooster Research (2023-2024)
Independent Study - College of Wooster Research (2023-2024)Independent Study - College of Wooster Research (2023-2024)
Independent Study - College of Wooster Research (2023-2024)
 
How to Invest in Cryptocurrency for Beginners: A Complete Guide
How to Invest in Cryptocurrency for Beginners: A Complete GuideHow to Invest in Cryptocurrency for Beginners: A Complete Guide
How to Invest in Cryptocurrency for Beginners: A Complete Guide
 
Importance of community participation in development projects.pdf
Importance of community participation in development projects.pdfImportance of community participation in development projects.pdf
Importance of community participation in development projects.pdf
 
International Sustainability Standards Board
International Sustainability Standards BoardInternational Sustainability Standards Board
International Sustainability Standards Board
 
Fabular Frames and the Four Ratio Problem
Fabular Frames and the Four Ratio ProblemFabular Frames and the Four Ratio Problem
Fabular Frames and the Four Ratio Problem
 
13 Jun 24 ILC Retirement Income Summit - slides.pptx
13 Jun 24 ILC Retirement Income Summit - slides.pptx13 Jun 24 ILC Retirement Income Summit - slides.pptx
13 Jun 24 ILC Retirement Income Summit - slides.pptx
 
BIHC Briefing June 2024 from Bank+Insurance Hybrid Capital in association wit...
BIHC Briefing June 2024 from Bank+Insurance Hybrid Capital in association wit...BIHC Briefing June 2024 from Bank+Insurance Hybrid Capital in association wit...
BIHC Briefing June 2024 from Bank+Insurance Hybrid Capital in association wit...
 
University of North Carolina at Charlotte degree offer diploma Transcript
University of North Carolina at Charlotte degree offer diploma TranscriptUniversity of North Carolina at Charlotte degree offer diploma Transcript
University of North Carolina at Charlotte degree offer diploma Transcript
 
The Impact of Generative AI and 4th Industrial Revolution
The Impact of Generative AI and 4th Industrial RevolutionThe Impact of Generative AI and 4th Industrial Revolution
The Impact of Generative AI and 4th Industrial Revolution
 

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.
  • 4. 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.
  • 5. • 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.
  • 6. 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.
  • 7. 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.
  • 8. 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.
  • 9. • 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.
  • 10. 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.
  • 11. 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.
  • 12. 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
  • 13. 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?
  • 14. 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.
  • 16. 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: 1. Fixed Costs 2. Variables Costs 3. Total Costs 4. Average Costs 5. Average Fixed Cost
  • 17. 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- axis
  • 18. 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: 1. Always originate frim zero 2. Is upward sloping and 3. Is parallel to the total cost curve
  • 19. Total cost • It is the sum of all fixed and variable costs on the production process. • Total Cost = Fixed Cost + Variable Cost
  • 20. 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
  • 21. 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.
  • 22. AverageFixedCost • It is the total cost divided by output. As the output increases the cost decreases • AFC = -------- FixedOutput_________ • Total Output
  • 23. Function of cost 1. Helps in profit and Loss Calculation 2. Helps managers in taking decisions 3. Helps in calculating total cost 4. Nature of the cost can help in planning
  • 24. 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
  • 25. REVENUE • As we see from the diagram above, graphically the Total Revenue curve: 1. Originates from zero and is upward slopping 2. 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.
  • 26. • 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
  • 27. PROFIT AND BREAK-EVEN 1. 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
  • 28. PROFIT AND BREAK-EVEN 1. 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.
  • 29. 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 • Loss = TR<TC • Break-Even = TR = TC
  • 30. 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.
  • 31. Objective Description 1. 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. 1. 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. 1. 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 1. Survival This is usually an objective for newly established business. Here the business aims to stay in the market and just cover it costs. 1. 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. 1. 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.