Production Fundamentals: Efficiency, Productivity, and Market Supply

Fundamentals of Production and Economic Efficiency

Core Economic Definitions

The Firm (Company)

A firm is dedicated to producing goods and services. The main reasons for establishing companies include: production control, the provision of funds, and reduced costs. Extraordinary profit attracts businesses to the market, while normal profit does not attract new businesses.

The Plant

A plant is the physical and organizational structure designed for the production of goods or services (e.g., a warehouse or a workshop).

Company: Comprehensive Organization

A complete organization that includes the various aspects of productive activity: planning, administration, production, and sale.

Industry Definition

An industry is the set of firms that produce the same good or service.

Economic Sector

A sector is any group of industries that are similar (e.g., the textile sector).

Technology and Optimal Production Factors

Technology is the set of technical expertise that enables individuals to achieve an optimal combination of production factors in order to obtain economic goods.

Technical Efficiency

A technology is technically efficient if it achieves maximum production.

Economic Efficiency

A technology is economically efficient if it allows goods and services to be developed with the minimum cost of the production factors used.

Measures of Productivity

Total Product (PT)

Total productivity is the total product obtained. PT = X = f(L, K)

Average Productivity (PME)

The ratio between total productivity and the number of work units used. PME = PT / L

Marginal Productivity (PMg)

The additional production yielded by the last unit of employment (labor). PMg = Increment PT / Increment L

Determinants of Individual Supply

Factors Influencing Individual Supply

• The Price of the Property: If the price increases, the quantity supplied increases; if the price decreases, the amount offered also decreases.
• The Price of Other Property:
  • If the price of a substitute good increases, the company will reduce the supply of the property in question and focus on the higher-yielding alternative.
  • If the price of a complementary good increases, its demand decreases, which also negatively affects the supply of the good in question.
• The Technological Level: Incorporating new technologies leads to an increase in production levels, quality improvement, and a decrease in cost.
• The Business Objectives: The maximization of profits may cause an increase or decrease in the offer, depending on the marginal cost and marginal revenue of each product.