Unit 3.- PRODUCTION, PRODUCTIVITY AND COSTS OF PRODUCTION UNIT 3.- PRODUCTION, PRODUCTIVITY AND COST OF PRODUCTION Unit 3.- PRODUCTION, PRODUCTIVITY AND COSTS OF PRODUCTION UNIT 3.- PRODUCTION, PRODUCTIVITY AND COSTS Departament d'Economia. IES BENICALAP. 2013/2014
UNIT 3.- PRODUCTION, PRODUCTIVITY AND COST OF PRODUCTION Production. Process carried out by enterprises by combining scarce resources (factors of production) to produce goods and services. UNIT 3.- PRODUCTION, PRODUCTIVITY AND COSTS Departament d'Economia. IES BENICALAP. 2013/2014
UNIT 3.- PRODUCTION, PRODUCTIVITY AND COST OF PRODUCTION By combining the inputs to produce goods, enterprises activity adds value to the resources used by them. This is the Value added that consists of the difference between the revenues and the cost of the natural and manufactured materials purchased. Value added is distributed between wages, profits and cost of capital. UNIT 3.- PRODUCTION, PRODUCTIVITY AND COSTS Departament d'Economia. IES BENICALAP. 2013/2014
UNIT 3.- PRODUCTION, PRODUCTIVITY AND COST OF PRODUCTION Activity 1.1.- UNIT 3.- PRODUCTION, PRODUCTIVITY AND COSTS Departament d'Economia. IES BENICALAP. 2013/2014
UNIT 3.- PRODUCTION, PRODUCTIVITY AND COST OF PRODUCTION Productivity. Relationship between the amount of output (quantity produced) and the amount of one factor of production used to produce the output. Labour productivity.- If a firm employees 10 workers who produce 200 units of good A. The labour productivity is 20 units/worker. Quantity of labour can be also measured with the number of hours worked. UNIT 3.- PRODUCTION, PRODUCTIVITY AND COSTS Departament d'Economia. IES BENICALAP. 2013/2014
UNIT 3.- PRODUCTION, PRODUCTIVITY AND COST OF PRODUCTION In the same way we can obtain the productivity of capital and land by dividing the quantity produced (output) by the quantity of factor (capital or land) If a firm employees 10 workers that produces 200 units of good A, then the labour productivity is 20 units/worker. If the enterprise uses 2 machines, the productivity of capital is 100 units. UNIT 3.- PRODUCTION, PRODUCTIVITY AND COSTS Departament d'Economia. IES BENICALAP. 2013/2014
UNIT 3.- PRODUCTION, PRODUCTIVITY AND COST OF PRODUCTION Previously, we have calculated productivity as average of output by unit of factor of production. British economists of the end of the XIX century were interested in what happened in the margin. Instead of the average productivity they stood out the productivity of the last unit made. We are only going to study the marginal productivity (or product) of labour: Marginal_product_of_labour Activity 5 (see the notes) Activity 1 (see the notes) UNIT 3.- PRODUCTION, PRODUCTIVITY AND COSTS Departament d'Economia. IES BENICALAP. 2013/2014
UNIT 3.- PRODUCTION, PRODUCTIVITY AND COST OF PRODUCTION THE LAW OF DIMINISHING RETURN WARM UP ACTIVITY The law of diminishing returns states that in all productive processes, adding more of one factor of production, remaining the rest of factors constant, can at some point result a minor productivity. The law of diminishing returns does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in fact this is common. See activity 1 in the notes. UNIT 3.- PRODUCTION, PRODUCTIVITY AND COSTS Departament d'Economia. IES BENICALAP. 2013/2014
UNIT 3.- PRODUCTION, PRODUCTIVITY AND COST OF PRODUCTION ECONOMIES OF SCALE.- Until now, we have been referring to the productivity in the short run. It implys that only one factor is variable (normally labour) and the rest remain fixed. To survive in the long run, enterprises have to grow. To do this they have to increase the quantity of factors (all variable in the long run) and improve their technology. UNIT 3.- PRODUCTION, PRODUCTIVITY AND COSTS Departament d'Economia. IES BENICALAP. 2013/2014
3.- COST OF PRODUCTION Go to the notes of the unit. UNIT 3.- PRODUCTION, PRODUCTIVITY AND COSTS