What are Production and Costs?
In Chapter 2, we learned about the behaviour of customers. Now, in this chapter and in the next, let us analyse the behaviour of a manufacturer (producer). Production is the procedure by which inputs are changed into output. Production is carried out by the manufacturers or firms. An enterprise obtains different inputs like machines, labour, raw materials, land, etc. It utilises these inputs to manufacture output. This output can be utilised by customers or by other enterprises for further production.
For instance, a tailor uses a sewing machine, thread, cloth and his own employees to produce clothes. A farmer uses his labour, land, seed, fertilizer, water, a tractor, etc. to produce rice. A car manufacturer utilises machinery, labour, land for a factory, and different other inputs (aluminium, rubber, steel etc.) to manufacture cars.
We make definite simplifying presumptions to begin with. Production is instant: in our simple model of production no time elapses between the combination of the inputs and the production of the output. We tend to use the terms supply and production identically and often conversely.
In order to obtain inputs, an enterprise has to pay for them. This is known as the cost of production. The moment the output has been manufactured, the enterprise sells it in the marketplace and draws revenue. The difference between cost and revenue is known as the firm’s profit. We presume that the aim of an enterprise is to draw the utmost profit that it can. In this chapter, let us learn the association between inputs and outputs.
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