Firms and Production

Demand for factors of production

• Cost

• Quantity

• Productivity

Capital Intensive Firms

Firms that use mainly machinery in production

• Big Markets

• Profit maximization goal

• Cost of Labour

Labour Intensive Firms

Firms that use mainly labour in production

• Skilled workers may be more efficient

• Flexibility

• Interest costs

• Smaller markets

• Supply of Labour

Production and Productivity

Production - Total output of goods and services

Productivity - How efficient the production process is per unit

• Investment

• Innovation

• Skills of Workers

• Competition

• Entreprenuers

Definitions

Total Cost - The total cost of all factors of production used when producing the product

Average Cost - Total cost divided by output

Total Fixed Cost - Costs that do not change in the short term

Average Fixed Costs - Total fixed costs divided by output

Variable Costs - Costs that change in the short term

Total Variable Costs - Total Variable costs divided by output

Total revenue - the total amount of money received from selling a product. (Sales-Cost)

Average revenue - the total revenue divided by the quantity sold.

Objectives of Firms

• Survival

• Social welfare

• Profit Maximization

• Growth

Competitive Markets

Advantages

• Lower costs

• Lower prices

• More choices

• Better quality

• Lower barrier to enter

Disadvantages

• May not be able to invest

• Firms may go out of business fast

• May produce similar products

Monopoly Market

Advantages

• May provide specialist products

• Higher profits allowing for investment

• Price may be lower

Disadvantages

• Higher prices

• lower quality

• inefficient allocation of resources

• No investment