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