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Cost and Production Functions in Economic Theory Essay

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Updated: May 3rd, 2021

The economic theory represents a broad impression for the description and comprehension of the flow of products in a marketplace. The extent of total production denotes the output generated by an organization in the course of a given year (Shepherd, 2016). It includes sold goods and commodities meant to be traded, the generated amount of stock, in addition to products that are either in the process of, scheduled to or have already been reused by the organization.

The average production determines the degree of contribution of each worker and is computed by dividing the entire output by the number of employees involved in its generation. The cost of production enables an organization to establish the outlays it incurs before sales. It is the entire expenditure of generating a year’s stock, which comprises both direct and indirect expenses, for instance, overhead and labor costs.

Companies employ the cost of production in the determination of how effectively they are manufacturing their goods. Marginal decision-making is a vital analytical technique in business management, which enables organizations to assess the benefits of producing commodities versus their costs. Companies that are efficient and maintain their cost of production low enjoy high profits from the sale (Cobo-Reyes, Lacomba, Lagos, & Levin, 2017).

On the contrary, companies that are inefficient and with high production costs have reduced profits. In this aspect, the knowledge of the cost of manufacturing makes an organization able to establish a favorable price for an item (Chen & Inklaar, 2016). Comprehending the variations in an organization’s short-term productivity offers a basis for the realization of how its costs of production vary as the company changes its rate of output.

References

Chen, W., & Inklaar, R. (2016). Productivity spillovers of organization capital. Journal of Productivity Analysis, 45(3), 229-245.

Cobo-Reyes, R., Lacomba, J. A., Lagos, F., & Levin, D. (2017). The effect of production technology on trust and reciprocity in principal-agent relationships with team production. Journal of Economic Behavior & Organization, 137, 324-338.

Shepherd, R. W. (2016). Theory of cost and production functions. Princeton, NJ: Princeton University Press.

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IvyPanda. 2021. "Cost and Production Functions in Economic Theory." May 3, 2021. https://ivypanda.com/essays/cost-and-production-functions-in-economic-theory/.

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IvyPanda. (2021) 'Cost and Production Functions in Economic Theory'. 3 May.

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