Business Structures, Production Factors and Cost Concepts
Company as the Economic Unit of Production
The company is the economic unit of production. We can classify enterprises by several criteria:
- By size: large, medium, and small businesses.
- By legal form: as regulated under law, there are individual (sole proprietorships) and corporate businesses.
- By ownership: according to the business owner, they can be public or private.
Factors of Production
Factors of production are typically divided into labor and capital. Capital refers to the set of resources used in production, such as machinery and buildings.
Types of Capital
- Real capital: the factor in the strict sense, tangible and intangible assets subject to depreciation or amortization (e.g., machinery, buildings).
- Financial capital: a set of financial instruments such as money, shares, or debentures that the company holds for capital gains.
- Human capital: the capacities and skills that members of society possess and that contribute to production.
Production can be classified by method into manual, mechanical, or automatic processes. We can also distinguish between:
- Limiting factors: those that must necessarily be employed in a certain amount to obtain a specific output.
- Substitutable factors: those that are not necessarily fixed in the process and can be replaced by other inputs.
The Production Function, Productivity and Efficiency
The production function expresses all possible relations between quantities of inputs used and the total amount of product obtained (inputs and outputs).
Law of Diminishing Returns
The law of diminishing returns (in the short run) applies when at least one factor of production remains fixed. The short run is the period during which some production factors remain fixed; the long run is when all production factors are variable. In the short run, taking some factor as fixed can lead to the law of diminishing returns.
Productivity
Productivity relates the amount of product obtained to the quantities of factors used. It is generally considered by keeping other factors constant while varying one factor:
- Total productivity: the total level of production achieved for a given level of a factor.
- Average (mean) productivity: the relation between the amount of product obtained and the amount of factor used (output per unit of input).
- Marginal productivity: the change in total production that results from a one-unit increase in the factor.
Division of Labor and Efficiency
The division of labor can be social or international. Technical efficiency is achieved when maximum manufacturing output is obtained with a given amount of economic factors; economic efficiency refers to the cost of the productive option chosen.
The Cost of Production
Production cost is the sum of the values of the factors used to produce. Costs are typically divided into:
- Fixed costs: costs that do not vary with output in the short run.
- Variable costs: costs that vary directly with the level of output.
Other cost measures include:
- Total cost: the sum of all fixed and variable costs.
- Average cost: total cost divided by the number of units produced (cost per unit).
- Marginal cost: the additional cost of producing one more unit of output.