Core Principles of Production and Economic Costs

Understanding Production and Economic Costs

Three Perspectives on Production

• Economic Production: (Indicating the purpose of production within the circular flow of income) Production is a process whose objective is to meet the needs of families (the basic unit of consumption) by manufacturing products (goods and services) from production factors employed by the enterprise (the basic unit of production).
• Functional-Utilitarian Production: (Pointing to the utility that production serves) Production is a process that adds value to things, granting them more utility than they had before undergoing the process.
• Technical Production: (Describing how production is done; e.g., some apartments after the crisis are not sold due to their high price) This involves combining productive resources such as labor, raw materials, machinery, energy, or technical elements, implementing a determined technology in order to obtain a product (goods and services). It determines whether it is feasible to manufacture a product (e.g., an electromagnetic drive).

Key Production Concepts

Value Added: This is the additional utility that production brings to things, adding to the value they had before being subjected to this process.

Productivity (Technology): This is a set of processes, production equipment, and machines which, at any given time, combine material factors, human, and organizational resources in order to produce a good or a service.

Law of Production: The higher the number of products we manufacture, the lower the cost of each product or service will be (higher production leads to lower unit costs).

Cost of Production: This is the value of resources used to produce a good or a service.

Types of Costs

• Fixed Costs: Those that do not vary if you change the quantity produced. They correspond to the value of fixed resources for the enterprise.
• Variable Costs: Those costs proportional to the number of units produced (e.g., raw materials).
• Total Costs: Fixed Costs + Variable Costs (FC + VC).

Economic Laws and Related Concepts

Law of Diminishing Returns: This law states that increasing the amount of one factor, while keeping the rest constant, will cause the increase of total production to become increasingly slow, eventually stopping growth and potentially decreasing.

Concepts Related to Production

• Specialization: Enterprises and workers perform tasks they know how to do better at a lower cost.
• Independence (Interdependence): Some companies rely on others to achieve their objectives.