This is an Economics project which will help in understanding the concept of production, the costs involved in it, and the contributing factors associated with both.

1. Relation between
Production & Cost
Name: Chhavi Bhatt

2. What is
Production?
The activity of production goes ahead of
manufacturing. It comprises a process or
service that creates value, including
transportation, distribution, and sales.
Production includes several important
decisions that determine the behaviour of
businesses.
Input Output

3. Natural resources
Labor
Capital
Technology
Entrepreneurship
The cost of a product is determined by how many inputs (or
factors of production) are required to produce it and how
much those inputs cost. Following are the factors of
production:
1.
2.
3.
4.
5.
Factors of Production

4. The Production Function
The functional relationship between quantities of
inputs used in production and outputs to be produced.
Product function is different for different products.
Q=f[L,K]
where L represents all the variable inputs, and K represents
all the fixed inputs.

5. These are components of production that do not
change like machines and equipment.
FIXED INPUTS
There are changeable resources in production like
raw material, and number of labourers.
VARIABLE INPUTS

6. Short-run & Long run
Short-run is a time period so short that there
is at least some fixed input.
[Since there are some fixed inputs in the
short run, the only way output can be
changed is by changing the variable inputs.]
Long-run is a period of time so long that all
inputs are considered variable.

7. TOTAL PRODUCT (TP) is the output produced by the
use of fixed inputs and variable inputs.
MARGINAL PRODUCT of an input is the extra output
produced by one additional unit of that input while
other inputs are held constant.
AVERAGE PRODUCT equals total product divided by
total units of input used.
MP=ΔTP/ΔL

9. Law of Diminishing
Marginal Product
if more variable input units
are used along with a certain
amount of fixed inputs, the
overall output might grow at
a faster rate initially, then at a
steady rate, but ultimately, it
will grow at a declining rate.

10. The basic goal of a firm is to
maximize its profits. A firm that
does not seek profit maximisation
is either eliminated or absorbed by
firms that do seek that goal.
A firm can achieve profit when the
value of its output is greater than
value of inputs.
THE BUSINESS'S GOALS

11. Sales - Costs= Profits
OR
Total Revenue - Total Costs= Profit
TOTAL COST refers to all expenses incurred during
the economic activity or the production of goods or
services.
TOTAL REVENUE is the amount received from the
sale of the product.
Price of the output * Quantity sold

12. IMPLICIT COSTS
are the opportunity costs of using
resources owned by the firm.
Examples: Using an extra room of your
house as a workout space you let go of an
opportunity to rent it out to others.

13. EXPLICIT COSTS
are payments to non-owners of a firm
for their revenues such as labour or the
use of a building
Examples:
1. wage paid to labours
2. rental charge for a building
3. the cost of electricity etc.

14. FIXED COST
These are also referred to as overhead or supplementary cost.
These are expenses for the use of fixed factors of production.
Fixed costs stay the same no matter what changes.
VARIABLE COST
These are expenses that change due to changed quantity of
output produced.
In case of reduction of production there should be a
corresponding decrease in variable costs to maintain
production efficiency

15. However, some costs can have a component or part
that is fixed and part that is variable. Such costs are
called Mixed Costs.

16. Total variable cost (TVC)
It is a cost that varies with the level of output.
Total fixed cost (TFC)
It is a cost that does not vary with output.
Total cost (TC)
is the sum of total variable cost and total
fixed cost:
TVC+TFC=TC

17. Average Cost
The average cost is the cost on average of producing a
given quantity. We define average cost as total cost
divided by the quantity of output produced.
AC=TC/Q
Marginal Cost
It is the cost of producing one additional unit of output. It
is the change in total cost when one additional unit of
output is produced.
MC=ΔTC/ΔQ

18. Economies of Scale
"Economies of scale" refers to the
situation where, as the quantity of
output goes up, the cost per unit goes
down, i.e, the average cost of
production of a larger firm is lower
than that of a smaller firm

19. Long-run costs are accumulated
when firms change production levels
over time in response to expected
economic profits or losses.
Short-run costs are accumulated in
real-time throughout the production
process

20. Technology and Production Costs
Technology is a way in which inputs are
utilised to produce outputs.
Improvement in technology leads to a
decrease in the cost of producing a
given quantity of output

21. Important points
Any change in the
production process
will cause a change in
production cost.
Long-run costs are
usually less than
short-run costs
because you have
more options.

22. Conclusion
There is an inverse relationship
between production and costs.
The harder it is to produce
something, for example, the
more labour it takes, the higher
the cost of producing it.

23. References
Investopedia:
https://www.investopedia.com/terms/p/production
-cost.asp
https://saylordotorg.github.io/text_principles-of-
economics-v2.0/s11-production-and-cost.html
Lumen Learning:
https://saylordotorg.github.io/text_principles-of-
economics-v2.0/s11-production-and-cost.html