Understanding Production: Economic Perspectives & Business Operations
Economic Perspectives on Production
Production is the process of combining resources to create goods and services that meet societal demands, aiming for profit. There are three main perspectives:
- Economic: Focuses on meeting needs through the use of production factors.
- Functional-Utilitarian: Views production as adding value and utility.
- Technical: Emphasizes the combination of resources and technology to create products.
Efficiency in Production
Efficiency involves using the least amount of resources to achieve maximum output. Economic efficiency means selecting the most cost-effective technology.
Diminishing Returns and Economies of Scale
Diminishing returns occur when increasing one input while holding others constant leads to smaller increases in output. Economies of scale refer to cost reductions achieved by large firms through increased production.
Business Operations and Distribution
Distribution Channels
- Own: Direct distribution by the company, allowing for better customer interaction and information gathering.
- External: Using third parties for distribution, focusing on planning and management.
Company Classification
- By Activity: Primary (natural resources), secondary (industrial), tertiary (services).
- By Ownership: Private, public.
- By Legal Structure: Individual, partnership, corporation.
Components of a Company
- Human Element: Employees and their roles.
- Capital Assets: Fixed and current assets used in production.
- Organization: Structure and coordination of activities.
External Environment
External factors influencing the company can be general (affecting all companies) or specific (unique to the company).
Key Operators
Consumers
Consumers make decisions based on preferences and income levels.
Entrepreneurs
Entrepreneurs coordinate production activities to achieve goals.
Workers
Workers contribute labor in exchange for wages.
Rentiers
Individuals who earn income from capital or natural resources.
Consumers (Strict)
Those not involved in the production process.
Business Objectives
- Maximize profit (Revenue – Costs).
- Stabilize and grow market presence.
- Generate employment and wealth.
- Respect the environment.
Public Sector Role
The public sector, including local, autonomous, and central administrations, sets rules and influences economic activity.
Circular Flow
The circular flow represents the exchange of income and goods/services between businesses and families.