Production, costs and productivity

Production creates goods and services that satisfy wants. It includes farming, manufacturing, transport, teaching and many other activities. Economists often distinguish land, labour, capital and enterprise as factors of production. Land covers natural resources; labour is human effort; capital is produced equipment used to make other goods; enterprise combines resources and bears business uncertainty. Money can buy capital goods, but money itself is not the same as a productive machine.

Productivity measures output per unit of an input. Labour productivity, for example, can be calculated as output divided by labour input over a stated period. If five workers make 100 tables in a week, output per worker is 20 tables that week. A business can increase total output by employing more workers without necessarily increasing output per worker. Always distinguish the level of output from the efficiency of resource use.

The short run is a period in which at least one factor of production is fixed. The long run allows all factors to vary. These are economic definitions, not fixed numbers of months. Fixed costs do not change with output within the relevant range, while variable costs change as output changes. Total cost equals total fixed cost plus total variable cost. Average total cost is total cost divided by units produced, provided output is not zero.

Marginal cost is the addition to total cost caused by producing an additional unit. If total cost rises from ₦8,000 at ten units to ₦8,700 at eleven units, marginal cost of that extra unit is ₦700. Average and marginal measures answer different questions. A high fixed cost does not imply that every additional unit has a high marginal cost.

Specialisation can improve skill, save switching time and encourage the use of suitable machinery. However, monotonous work and dependence on other producers can create disadvantages. Economies of scale are reductions in long-run average cost as the scale of a firm's operation expands. They are different from simply spreading unchanged fixed costs across a few more units in the short run. In calculations, write the formula, substitute the quantities and state the unit of the answer.

Production as the creation of usefulness

Production includes the provision of services as well as the making of physical goods. Transport brings a product closer to its buyer, storage makes it available at another time, and teaching develops a useful service. These activities can add value even when they do not change the product's material form. Distinguish primary activities such as farming and extraction, secondary activities such as processing and manufacturing, and tertiary activities such as trade and transport. A firm may operate in more than one category.

The factors of production are often grouped as land, labour, capital and enterprise. Land includes natural resources; labour means human effort; capital means produced productive assets rather than simply every sum of money; enterprise coordinates resources and bears relevant business uncertainty. Traditional textbook factor rewards are rent, wages, interest and profit. In an actual business, payment arrangements can be more complex. Use the categories to explain the productive role rather than assume that a person can perform only one role.

Short run, long run and productivity

The short run is a period in which at least one factor is fixed for the decision under study. The long run allows all factors to vary. These are analytical definitions rather than a universal number of months. A bakery may be able to add casual labour tomorrow but require much longer to replace its building. Its short-run decisions therefore differ from those of a mobile service provider that can expand equipment quickly. State which input is fixed before applying the law of diminishing returns.

Total product is total output from an input combination. Average product of labour is total product divided by the number of workers. Marginal product is the addition to total output from one extra unit of the variable input, keeping other relevant inputs fixed. If three workers produce 45 loaves and four produce 64, the marginal product of the fourth worker is 19 loaves. Average product with four workers is 16 loaves. Marginal and average are different measures, even when a particular example happens to give equal values.

Diminishing marginal returns occur when additional units of a variable factor eventually add less extra output to fixed factors. Total output can still rise while marginal output falls. Imagine adding workers around the same small oven: coordination initially improves, but later workers may have to wait for space. This is not the same as diseconomies of scale. Diminishing returns concern a short-run change with some fixed inputs; economies and diseconomies of scale concern changes in the scale of production when all inputs can vary.

From output to cost

Total cost equals total fixed cost plus total variable cost. A fixed cost does not change with output within the relevant short-run range; a variable cost changes as output changes. Rent for a contracted workshop is a standard fixed-cost illustration, while flour used in production is a variable-cost illustration. The classification depends on the decision period and contract. Calling electricity always fixed or always variable ignores standing charges, metered use and the specific question.

Average fixed cost equals fixed cost divided by output. Average variable cost equals variable cost divided by output. Average total cost equals total cost divided by output and is also the sum of those two averages. Marginal cost is the change in total cost divided by the change in output. If cost rises from ₦18,000 at 100 units to ₦20,400 at 120 units, the incremental cost per unit over the interval is ₦120. Do not divide the whole ₦20,400 by the extra 20 units when calculating marginal cost.

A firm may have an explicit money cost and an implicit opportunity cost. If the owner works without a salary, the best alternative earnings forgone may be relevant to economic profit even though no wage is paid in the accounts. Accounting profit and economic profit can therefore differ. The question must specify the cost concept. Likewise, break-even concerns total revenue equalling the relevant total cost; it does not automatically mean that cash receipts and cash payments occur at the same moments.

Scale, specialisation and sensible conclusions

Internal economies of scale arise within an expanding firm, for example from specialised equipment or spreading some overheads. External economies arise from growth in the industry or location, such as a wider pool of trained workers. Very large organisations may suffer coordination problems, communication delays or weak incentives. A lower unit cost is not guaranteed merely because output is larger. Distinguish a possible source of efficiency from evidence that it actually occurred in a particular firm.

Self-check: with fixed cost ₦12,000 and variable cost ₦18,000 at 300 units, total cost is ₦30,000 and average cost is ₦100. Average fixed cost is ₦40 and average variable cost is ₦60. Self-check: a worker's marginal product falls from 12 to 9 units. Total product can still rise by nine; it has not necessarily fallen. In an examination, write the formula, substitute the values, show the calculation and attach the correct units before interpreting the result.