Production Theory

Production theory looks at how businesses can most effectively combine labor and capital to achieve maximum efficiency. This can help firms increase output whilst also reducing output, thereby increasing profits.

Mass Production Definition

Mass Production Definition

Mass production is the continuous production of standardized products, usually along an assembly line. It involves making products in large quantities so that they can be provided to the masses. This type of production is able to maintain a consistent level of quality of output, but comes at the cost of a lack of flexibility.

Diseconomies of Scale Chart

Types of Diseconomies of Scale

So what are Diseconomies of Scale? It is an economic term that defines the trend for average costs to increase alongside output. At a specific point in production, the process starts to become less efficient. In other words, it costs more to produce an additional unit of output.

In economic jargon, diseconomies of scale occur when average unit costs start to increase. The graph below illustrates that at a point Q1, average costs start to increase.

Diminishing Marginal Returns

Law of Diminishing Marginal Returns

Diminishing Marginal Returns occur when increasing production further results in lower levels of output. In other words, production starts to become less efficient.

For example, a worker may produce 100 units per hour for 40 hours. In the 41st hour, the output of the worker may drop to 90 units per hour. This is known as Diminishing Returns because the output has started to decrease or diminish.

Sunk Costs Definition

Sunk Cost Definition

In economics, a sunk cost is a cost that has been made in the past and is no longer recoverable. These can come in the form of physical sunk costs, such as broken bottles, damaged clothes, or off-food.

fixed cost and variable cost graph

Marginal Cost Definition

Marginal cost comes from the cost of production. This includes both fixed and variable costs. In the case of fixed costs, these are only calculated in the marginal cost if these are required to expand production further.

Factors of Production Definition

Factors of Production Definition

In economics, the factors of production are the separate elements that work together to create a good or service. These include labour, land, and capital. All three are necessary in order to create the final good or service we consume.

Accounting Profit vs Economic Profit

Accounting vs Economic Profit

The main difference between accounting and economic profit is that economic profit includes implicit costs. Whilst accounting profits include the raw costs of doing business, economic profit includes the opportunity cost of employing those resources for an alternative use.