Major Economic Terms related to Production and Supply
Business organizations require enough resources for producing a set of products. The resources are limited in nature and thereby affects the production cycle. The behavior of the production cycle will change accordingly with the availability of the resources.
In this context, we will discuss some major economic-production terms like Total Product, Average Product and Marginal Product. Understanding and analysis of these terms are important in a business, especially one which is engaged in the production line. Let us begin our content with the economic and production knowledge delight.
Production and Cost play a Vital Role in a Business
Macroeconomics depicts the large-scale operational procedure of a business or enterprise. Moreover, both production and cost are two indispensable parts of it. Production plays a vital role in the survival of a business amid a competitive market. On the other hand, cost determines the volume of production. At large, any business aims to achieve optimum production efficiency by reducing production costs.
However, for that, one needs to know some fundamental concepts like a definition of production, total product formula, and likewise.
What is Production?
Production is a process of converting resources into products or services.
Production Function: it studies the fundamental difference between physical input and output.
Below is its formula.
Y= F (L.K)
Here, Y= Production, L= Labour and K= Capital.
What is the Total Product?
It refers to the total amount of output that a firm produces within a given period, utilising given inputs.
Total Product Formula is
TP= AP*L
Where AP= product/ labour unit; L= Labour
Average Product
It is output per unit of inputs of variable factors.
Average Product (AP)= Total Product (TP)/ Labour (L).
Marginal Product
It denotes the addition of variable factors to the total product.
Thus, Marginal product= Changed output/ changed input.
In other ways, marginal product leads to an increase of total product with the help of additional workers or input.
Relationship between Total Product and Marginal Product
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In order to derive the relation, first students need to remember the total product formula. Moreover, the law of variable proportions explains the relationship between these two.
Marginal Product = ∑ Total Product
This law explains
TP increases at an increasing rate when MP increases. This pattern provides a Total Product Curve with a shape of convex. It then continues till MP reaches the maximum point of TP.
Where MP declines and stays positive, TP increases at a decreasing rate. This pattern provides a Total Product curve with a shape of concave after reaching a point of inflection. It continues till the TP curve reaches its maximum.
When MP is negative and declining, TP declines.
In case MP is zero, TP reaches its maximum.
Relationship between Marginal Product and Average Product
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Just like the relationship between marginal product and total product, the connection between this two is mentioned below.
The marginal product remains above an average product when AP rises.
Similarly, MP remains below AP, in case AP declines.
Average product and marginal product become equal at the maximum AP.
Discussion of Minor Economic Terms related to Production
Short Run
This refers to a period when a particular business can make alterations in variable factors to influence production. However, here the fixed factors remain the same.
Long Run
In the long run, an enterprise can make any changes in all factors to attain the desired production.
Now that you get an overall idea of what is a production and different usages of the total product formula let’s proceed towards the fundamental concept of Costs.
Cost Function
It explains the relationship between the quantity produced and cost.
Thus,
C= F (Qx)
Here, C= Production –Cost and Qx= Quantity of x goods produced.
Cost of Production Cost
It refers to the cost incurred to purchase various factor inputs like land and employ labourers. This also includes the expenses of non-factor inputs like fuel, raw material, etc.
Total Cost
It is a total of fixed and variable costs and can be expressed as -
‘I’C= TFC+TVC
Where TFC= Total Fixed Cost
TVC= Total Variable Cost
Implicit Cost
It covers the cost of inputs that are self-owned used in production.
Explicit Cost
It accounts for standard business costs and also directly influences the profitability of a business, for instance, lease payments, wages, etc.
These are some of the most crucial factors of this chapter that students need to learn to perform well in the examination. Understanding these concepts may seem difficult at the beginning, but with proper guidance, it will become easier to comprehend.
Thus, if you want to know more about how to derive the total product formula or any other concepts of production and costs, visit Vedantu’s website or download the app. They have some useful and informative study materials that you can consult to clear your basics.
FAQs on Total Product, Average Product and Marginal Product
1. What is the difference between Production cost and Manufacturing cost?
Production cost denotes the overall expenses of running a firm. Whereas, manufacturing cost refers to the expenses that go towards making a product. Both these components are vital in determining the price of the end product. However, they have some differences.
While production cost includes various fixed and variable costs, manufacturing cost depends solely on the volume of the production as it increases with the production increase.
Two categories are there in production costs that are fixed cost and variable cost. Alternatively, manufacturing cost includes three categories that are materials, overhead and labour.
2. What are the three significant components of Manufacturing cost?
Three major components of manufacturing cost are material, direct labour and overhead.
Material refers to the packaging of finished products and raw materials.
Direct labour includes salary, overtime costs, payroll taxes and fringe benefits and other expenses payable to workers.
Overhead contains all additional expenses of manufacturing besides material and direct labour.
All three elements also closely influence the production cost of a business.
3. How many types of Manufacturing systems are there?
A manufacturing system is a broad concept that combines a collection of equipment and human resources. A combination of two takes an active part in one or multiple processing of raw materials.
This system is primarily divided into two major parts; 1) Intermittent production and 2) Continuous production. Intermittent is further divided into three sub-categories: project production, batch production and jobbing production. Similarly, Continuous production also has two parts: process production and mass/flow production.