Production, Costs, and Returns: Key Economic Concepts

Key Economic Concepts

Target Company: Beneficio. Maximizing benefits and minimizing costs can be expressed as absolute magnitudes, indicating economic costs and benefits in simple monetary units. Relative magnitudes are indicated in percentage terms, often more effective for comparing costs with other quantities, such as price.

Cost

The price of inputs or factors of production necessary to obtain average production outputs or physical units.

Benefit

The benefit an employer gets from the production and income of goods and services is the difference between total income (TI) and total cost (TC).

Price

The price of goods is the value expressed in monetary units, consisting of unit cost plus unit profit.

Production Function

Describes the relationship between factors of production and the output obtained.

Short-Term

A period where some factors of production (fixed factors) cannot be altered. Capital is a fixed factor. Production varies by altering variable factors.

Long-Term

A period long enough for all factors of production to vary, but not so long that basic technology changes.

Very Long-Term

Technological capabilities of the enterprise may vary, with new production methods emerging.

Total Product

The total amount produced during a period, determined by all production factors used.

Average Output

Total output per unit of variable factor.

Marginal Product

The change in total product resulting from using one more unit of a variable factor.

Law of Diminishing Returns

If quantities of a variable factor applied to a fixed factor increase, the marginal and average product of the variable factor eventually decrease.

Returns to Scale

The scale of a company, measured by returns to scale:

• Constant Returns to Scale: Varying all factors in the same proportion increases product in that proportion.
• Increasing Returns to Scale: Varying all factors in the same proportion increases product by a greater proportion, leading to economies of scale.
• Decreasing Returns to Scale: Varying all factors in the same proportion increases product by a smaller proportion, leading to diseconomies of scale.

Income

The amount of sales.

Total Cost

The value of inputs consumed in the production process.

Fixed Costs (FC)

Costs that do not depend on production volume, such as office rent. They disappear if the company ceases production.

Variable Costs (VC)

Costs that depend on production volume, such as raw materials. They do not appear if there is no production.

Average Cost (AC)

Total cost divided by the number of units produced (Q).

Marginal Cost (MC)

The increase in costs from producing an additional unit.

Productivity

The ratio of production over a period and the quantity of inputs consumed. It analyzes the efficiency of the transformation process.

Global Productivity (PG)

Explains the overall efficiency of the company, diagnosing the combination of factors used and the returns arising from them.