Production And Theory Of Costs (Economics)

Table Of Contents

  • Meaning Of Production
  • Types Of Production
  • Factors Of Production
  • Production Systems
  • Devices That Raise Production
  • Scale Of Production
  • Production Concepts
  • Production Costs Concepts
  • Revenue Concepts

Production is the creation of goods and services that satisfy human wants.

Production has been classified into three types. They are the following:

1. Primary Production

This involves extraction. e.g. The extraction of minerals and other raw material fall within primary production.

2. Secondary Production

Under this raw materials are processed into finished goods or capital goods.

3. Tertiary Production

This involves the production of services and distribution e.g. Teaching, retailing, transporting etc. It must be noted that production takes place when there are factors of production.

Factors Of Production

Factors of production refers to the things we use in production. They are inputs use in the creation of goods and services. Factors of production include the following:

1. Land: This refers to all resources provided by nature for the production of goods and services. It includes earth’s soil, minerals, vegetation, forest, rivers, rainfall etc.

Features Of Land

1. It is relatively fixed in quantity
2. It varies in quality from one place to another.
3. It is subject to diminishing return.

2. Labour: This refers to all human efforts used in production. It could be mental or physical.

3. Capital: This is assets set aside for further production. It is a produced means of production e.g hoe, biro, hammer, building etc.

Capital can be fixed or circulating.

Fixed capital, is durable and does not change in the process of production. Fixed capital can only depreciate e.g building, Hammer. Circulating capital or working Capital is the type that is used up in processed of production e.g raw materials, seeds, semifinished goods and fuel.

4. Entreprenuer: This is the organizer of other factors of production. Decides what should be produced and coordinates the other factors of production.

Production Systems

Production systems are the following: subsistence system, exchange system and market system.

1. Subsistence System

Under this system, production is meant for the consumption of the household. Products are not sold. e.g Primary society practised this.

2. Exchange System

Under this system, production is meant for exchange and family consumption. This is exemplified by farmers who use up some of their products and sell the rest.

3. Market System

Here production is entirely foe the market. Industrial products are purely for sale. Production of services such as teaching, barbing, shoe shining, banking, medical services etc. fall under this system. This system is practised in urban areas, advanced countries. This system is predominately characterized by specialization and division of labour. It is a progressive system.

Devices That Raise Production

To raise production devices such as specialized and division of Labour have been adopted.

1. Specialization

This is the concentration of Labour into different jobs, traders and production process e.g. Teacher teaches while a taxi driver drives.

Specialization has the following types:

Occupational specialization
Geographical specialization
Specialization by process.

1. Occupational Specialization:

This occurs when people specialize in different occupations. For example some peole trade, some teach and some entertain us with music.

2. Geographical Specialization

Specialize in the production of certain products which their geographical factors dictate. For instance, people in riverine areas concentrate in fishing while people in grassland hunt and rear animals.

3. Specialization By Process:

This is exemplified by Division of Labour. Division of Labour is the breaking down of production processes into different stages with each stage being handled by a specialist.

Merits Or Advantages Of Division Of Labour

1. Increases output
2. Encourages economy of Equipments
3. Saves time
4. Stimulates mechanization
5. It increases the Skill of Labour
6. Employment of specialists is possible.
7. Less fatigue is experienced by workers.

Demerits Or Disadvantages Of Division Of Labour

1. Monotony of work
2. Risk of unemployment
3. Decline of craftsmanship
4. Great interdependence
5. Results in industrial disputes
6. Results in over standardization of product.

Limitations To Division Of Labour

1. Size of the market
2. Level of Technology
3. Nature of the products.

Scale Of Production

This is the size of production unit or firm. It is small scale when the size is small and a large scale when the size is large.

Advantages Of Large Scale

1. Division of labour is possible.

2. Financial Economies is possible (i.e able to raise loans with ease).

3. Commercial Economies are enjoyed. e.g Bulk purchasing, warehousing and other market benefits are enjoyed.

4. Risk bearing Economies: i.e. Has varieties of products, If demand for a products fails, such company can depend on the other products.

5. Managerial Economies: It is in a better position to employ experts for management.

6. Welfare Economies enjoyed, ie. able to look after the welfare of its workers.

7. Raw material Economies possible i.e. Raw material could be stored to last longer time.

8. Research and development are possible die to abundance fund.

9. Operational Economies: e.g Low cost of production possible.

Disadvantages Of Large Scale Production

1. Adaptation to changes in demand is always easy.

2. It leads to monopoly.

3. Communication gap develops between chief executive and workers.

4. Over expansion may lead to wastage.

5. Complex problem engulfs the administration.

Advantages Of Small Scale of Production

1. Requires little capital for operation e.g Hair plaiting.

2. Market size does not limit the operation of small scale.

3. Adjust production to the damand easily.

4. Very suitable for direct personal services.

5. Provides abundant employment opportunities.

6. Administration cost is reduced especially with one man business.

7. The development of local technology is possible.

8. Low risks abounds.

Disadvantages Of Small Scales Production

1. Low output.

2. Low profit- bulk purchasing is not possible due to small capital.

3. Expansion is not easy.

4. Risk economies are not enjoyed.

5. Division of labour and specialization are not practised.

6. Management economics are lacking.

7. Research and development are not possible.

Reasons For The Domination Of Small Scale Firms In West Africa

1. They require small capital for operation.

2. Fear of risk bearing.

3. Small size of West Africa Markets.

4. Management may not require special skill and training.

5. Freedom of independence.

6. Fear and distrust do not encourage partnership or other combines.

7. They provide specialized services e.g shoe shining.

Production Concepts:

1. Optimum Size Firm

This is a firm that is at the point at which the profit is highest and unit cost of production is lowest. It is the best size of any firm. Any other beyond this leads to low profit and revenue loss.

2. Production Possibility Curve (P.P.C)

Nations productive resources are scarce or limited. Because of this, the amount of production that can be carried out is limited.

Assuming that a nation has only two commodities, X and Y to produce, but only a limited quantity of each can be produced with the available scarce resources.

When more quantities of X are produced less quantities of Y will be produced, While all the resources are devoted for the production of X, Y commodities will be produced. This situation will result into the Production Possibility Curve (PPC). Production possibility curve shows various combinations of the concerned goods that can be produced if all the available resources are fully used up.

Total, Average And Marginal Products

1. Total Product (TP)

This is the total quantity of a commodity produced during a given time by all the factors of production used in the production.
For example, if a bakery company produces 6000000 loaves of bread with its available factors of production, the total product or output is 6000000 loaves.

2. Average Product (A.P)

This is the total product divided by the number of variable factors used in the production.

3. Marginal Product (M.P)

This is the addition to the total output as a result of addition of a unit to the variable factor.

Production Costs Concepts

The following costs are incurred in the process of production:

1. Fixed Cost (F.C)

This is the aspect of a firm’s production cost which is fixed no matter the amount of goods produced in the shortrun.

This cost does not change with volume of output within a specified time.

Some examples include expenditure on capital equipment, Top management salary, rents etc. Fixed cost may be referred to as overhead cost.

2. Variable Cost (V.C)

This is the cost which change with output. As the output rises, the variable cost rises. Some examples include wages, for labour, cost of raw materials.

3. Total Cost (T.C)

This is the total cost incurred in the process of production of a given output. It is made up of total fixed cost and variable cost.

4. Average Cost (A.C)

This is the total cost of producing any output divided by the number of units produced.

5. Marginal Cost (M. C)

It is the change in total cost which is brought about by a unit change in the output.

6. Cost Concept And Profit

Maximization in the short run period. Both the Marginal cost and Average cost fall initially as output produced increases. But the Marginal cost curve sharply rises before the Average cost begins to rise gradually. The marginal cost curve cuts across the Average Cost Curve at the point where Averages cost is at its minimum.

The Revenue Concept

Various types of revenue accrue to a firm:

1. Total Revenue (TR)

This is th total amount of money which a firm realized after selling their products. It can be calculated by multiplying the unit price by the total output.

Total Revenue rises with output and decreases as the output decreased or price falls.

2. Average Revenue (A.R)

This is the revenue per unit of output sold. It is obtained by dividing the total revenue by the output sold.

3. Marginal Revenue (M.R.)

This is the change in total revenue brought about by unit change in the total output sold over a period of time.

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