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Production and Cost

Production and Cost. The amount of output (products) produced by a given amount of inputs (resources) in a specific amount of time Increased by division of labor and specialization. Productivity. Relationship between the factors of production and the output of goods and services

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Production and Cost

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  1. Production and Cost

  2. The amount of output (products) produced by a given amount of inputs (resources) in a specific amount of time • Increased by division of labor and specialization Productivity

  3. Relationship between the factors of production and the output of goods and services • Four Factors of Production • Land • Labor • Capital • Entrepreneurs Theory of Production

  4. Variable inputs (V) – things that can be changed easily • Number of workers • Amount of ingredients • Fixed inputs (F) – things that cannot be easily changed • Building size • Additional capital

  5. Total output increases as variable inputs increase • The more workers you have (to a certain point) the more you can produce • Marginal product (MP) is the extra output caused by the addition of one more unit of variable input • Firms do not hire additional workers if marginal product decreases

  6. Businesses must analyze costs before making decisions Costs

  7. Fixed Costs (FC) – costs incurred when business is idle and output is zero • Rent • Insurance

  8. Variable Costs (VC) – costs incurred when operations are up and output changes • Labor • Inputs

  9. Total Costs = Fixed Cost plus Variable Cost (TC=FC+VC) • All the money you spend to make a product

  10. Marginal Cost (MC) – the extra cost incurred when a business produces one additional unit of a product

  11. Money brought in for selling goods or services Revenue

  12. Total revenue (TR) = number of units sold multiplied by the average price per unit • Sell 50 t-shirts for $10 each = $500 in TR

  13. Fixed Cost + Variable Cost = Total Cost FC + VC = TC • Price of product x Quantity sold = Total Revenue P x Q = TR • Total Revenue – Total Cost = Profit/Loss TR – TC = Profit Calculating Profit

  14. Marginal revenue (MR) – extra revenue associated with the production and sale of one additional unit

  15. Average Total Cost (ATC) is Total Cost divided by output • Average Variable Cost (AVC) is Variable Cost divided by output Averages

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