Economic Concepts: Opportunity Cost, Capital, and Production

Opportunity Cost

Unitary Opportunity Cost: The number of units of a product you must renounce to produce an additional unit of another product.

Total Opportunity Cost: The same concept applied to producing X units of another product.

Efficient Point: Achieving maximum production.

Capital Classifications

Capital has three distinct meanings:

• Real Capital: The capital factor strictly speaking. It encompasses a set of elements that collaborate in production and have been handmade by humans.
• Tangible Capital: Buildings, machinery, and equipment.
• Intangible Capital: Models, designs, and software.

Real capital suffers a loss of value and productive capacity during the production process, known as depreciation:

• Physical: Due to the effects of overtime.
• Functional: Due to the use of the good.
• Economic: Due to the market introduction of new, more productive equipment, leading to obsolescence.

Financial Capital: The set of money or titles, such as shares, that a company uses to acquire real capital.

Human Capital: The productive capacity possessed by the members of a society. This term indicates that investment is necessary to increase the productive capacity of the workforce.

Market Dynamics and Demand

Factors influencing demand include the price of the good and income levels. Goods are categorized as normal, inferior, necessary, or luxury.

Law of Demand: Expresses the relationship between a good's demand and its price: if the price increases, the demand for the good decreases, and vice versa. Its graphical representation is called the demand curve.

Market: The set of offerings accompanied by their corresponding demands. Markets establish mechanisms to determine the prices of exchanges for goods, services, or productive factors.

Production and Efficiency

Long Term: A period of time long enough to alter all production factors.

Economies of Scale: A firm experiences economies of scale if unit production costs (average cost) decrease as the scale of production increases.

Production Functions: These indicate the relationship between the amount of factors used and the maximum amount of production generated per period of time: PT = f(M, L, K).

The main objective of the production function is to provide knowledge about the efficiency in the use of factors. By indicating the maximum possible production, it discards less efficient production processes.