Firms and Production, Firm's costs, Revenue and Objectives

Production

Firms combining the factors of production to make goods and services

Specialization

Specialization is the process wherein a company or individual decides to focus their labor on a specific type of production.

Productivity definition

Productivity measures the amount of output that can be produced from a given amount of input.

How is productivity considered to be increased?

More output or revenue is produced from the same amount of resources.

Same output or revenue can be produced using fewer resources

Labor productivity

Most common measure of factor productivity

Total output per period / number of employees

Revenue calculation

Total revenue per period / number of employees

How to increase factor productivity

training workers to improve existing skills and learn new skills.

rewarding increased productivity with performance related pay and bonus payments

encourage employees to buy shares in their organization

increase job satisfaction

replacing old plant or machinery with new and more efficient machines

introduction new processes and working practices designed to continually reduce waste, increase speed, improve quality and raise output in all areas of a firm. (lean production)

profit definition

amount of money a business earns after subtracting all its costs from its total revenue.

formula for profit

profit = total revenue - total cost

revenue definition

total amount of money a business earns from selling its goods or services before any costs are subtracted.

fixed costs

costs that don't vary with the amount of business activity like rent, salaries, and machinery. It is a straight line on the graph.

variable cost

costs that vary with the amount of business activity. It slopes upward. For example raw material, wages, commisions on sales.

Total variable cost

variable cost per unit x quantity produced

total cost

total fixed cost + total variable costs

total revenue formula

total revenue = price per unit x quantity sold

average revenue (smae as price of product)

total revenue / total units sold