4.1 Production, Costs & Profit
 There’s no such thing as
“free”
 Everything has a cost
 Production creates
expenses for businesses
Production, Costs & Profit
 Business
 An enterprise that brings individuals, financial resources, and
economic resources together to produce a good or service for
economic gain
 Production
 The process of transforming a set of resources into a good or
service that has economic value
 Inputs
 The resources used in production
 Outputs
 The quantity of a good or service that
results from production
Productive Efficiency
 There are different ways to produce a good/service:
 Labour-intensive Process
 A production process that employs more labour and less capital
 Capital-intensive Process
 A production process that employs more capital and less labour
Choosing a Production Process
 Pure ’n’ Simple T-Shirts can produce a daily output of 250 Tshirts with one of two possible combinations of workers and
sewing machines:
 A – a more labour-intensive process and
 B – a more capital-intensive process
Workers (labour)
Sewing Machines (capital)
Process A
4
2
Process B
3
3
Choosing a Production Process
Workers (labour)
Sewing Machines (capital)
Process A
4
2
Process B
3
3
 We can maximize the business’s productive efficiency by using
the lowest-priced combination of workers and sewing machines
needed to turn out the daily output of 250 T-shirts.
 Daily Cost of Worker (wages + benefits) = $100
 Daily Cost of Sewing Machine (electricity + maintenance) = $25
 All other costs remain constant (e.g. rent)
Choosing a Production Process
Workers (labour)
Sewing Machines (capital)
Process A
4
2
Process B
3
3
 Process A
 Daily Cost = ($100 x 4workers) + ($25 x 2machines) = $450
 Process B
 Daily Cost = ($100 x 3workers) + ($25 x 3machines) = $375
 Thus, in this case, productive efficiency is maximized by using
the capital-intensive Process B.
Economic Costs
Business face 2 types of costs: explicit costs and implicit costs.
 Explicit Costs
 Payments made by a business to businesses or people outside of it
(e.g. wages, buildings, machinery, materials).
 Implicit Costs
 The owner’s opportunity costs of being involved with a business.
 E.g. normal profit – the minimum return that owners must receive to
keep their funds
 Economic Costs
 A business’s total explicit and implicit
costs
Economic Profit
 Accounting Profit
 The excess of a business’s total revenue over its explicit costs
 Economic Profit
 The excess of a business’s total revenue over its economic costs