Production Theory Archives

Production Theory

Producer Surplus Definition

Producer Surplus Definition

The producer surplus is the difference between what the producer sells its goods for and the minimum price it would be willing to sell for. In other words, because the producer is selling at a higher price than they would accept, a ‘producer surplus’ is created.

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.

Market Failure Definition

Market Failure

A market failure is said to occur when there is an inefficient allocation of resources. This can occur when the supply does not fully reflect demand. So there might be an undersupply or oversupply.

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.

Marginal Cost = Marginal Revenue

Marginal Revenue Definition

Marginal Revenue is the money a firm makes for each additional sale. So if a baker sells an additional loaf of bread for $2, then their marginal revenue is also $2.

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.

fixed cost and variable cost graph

Fixed Cost Definition

A fixed cost is a cost that a business must pay whether it produces one product or a million. The cost to the business remains the same.

Variable Cost Definition

Variable Cost Definition

We can define a variable cost as a cost that changes based on the output of the business. Each additional unit has a variable cost. For example…