Understanding Business Production and Efficiency

The Role of the Company

The company is the basic economic unit in the face of production and is responsible for producing and publicly holding most goods and services.

The Employer's Evolving Role

The traditional employer is the person providing the capital and, at the same time, performing the functions of management. In companies, the entrepreneur-manager assumes the risk, and many times, is the founder.

As large companies emerge, there is a separation between the classical functions of the employer. On one side is the figure of the investor, who assumes the risks linked to the promotion and innovation by providing capital. On the other, it strengthens the role of the professional director, specializing in management and business administration. Thus, there is a clear separation between ownership and management of the enterprise.

Technical Efficiency

A method of production is considered technically efficient if production obtains the maximum possible output with a given amount of factors.

Production: The Core Activity

The main activity carried out by any production company is the use of production factors and intermediate inputs for goods and services.

Technology's Impact on Production

Technology includes not only the equipment used by these companies but also how to combine human and material resources to produce goods and services. It is the set of processes, procedures, equipment, and tools used to produce goods and services.

The Production Function

The production function (f) specifies the relationship between the amount of factors used, namely labor (L) and capital (K), to produce a good and the quantity produced of that good (q). q = f (L, K)

Short-Term Production Dynamics

Short-term production involves fixed factors that cannot be changed in the short term (buildings, machinery) and variable factors that can change in the short term (raw materials, workers). The short term is a period of time between one day and one year, and the long term is longer than one year.

Total and Marginal Product

Drawing on the production of an ice cream maker, the total product (PT) is the amount of ice cream you get for different levels of work.

Marginal product (PML) measures the change that occurs in the amount of ice cream, that is, in the PT when using one more unit of the variable factor, namely labor (MPL = ΔPT / ΔL).