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 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.
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.
Economies of scale occur when a business benefits from the size of its operation. As a company gets bigger, it can benefit from a number of efficiencies.
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 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.
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.
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…
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.
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.
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.
