In which p 1 denotes the price of a unit of the first variable factor, r 1 denotes the annual cost of owning and maintaining the first fixed factor, and so on. The cost of production is simply the sum of the costs of all of the various factors. Finding the cheapest of these is the problem of cost minimization. It must be noted that though the quantities of the factors determine the quantity of output, the reverse is not true, and as a general rule there will be many combinations of productive factors that could be used to produce the same output. The entire formula expresses the amount of output that results when specified quantities of factors are employed. The available quantity of the first fixed factor is indicated in the formal by k 1 and so on. The firm is also presumed to use m fixed factors, or factors like fixed machinery, salaried staff, etc., the quantities of which cannot be varied readily or habitually. In the formula the quantity of the first variable factor is denoted by x 1 and so on. The firm is presumed to use n variable factors of production that is, factors like hourly paid production workers and raw materials, the quantities of which can be increased or decreased. This relationship can be written mathematically as y = f ( x 1, x 2. It states the amount of product that can be obtained from each and every combination of factors. This task is best understood in terms of what is called the production function, i.e., an equation that expresses the relationship between the quantities of factors employed and the amount of product obtained. Taking the quality of the product and the prices of the productive factors as given, which is the usual situation, the firm’s task is to determine the cheapest combination of factors of production that can produce the desired output. However much of a commodity a business firm produces, it endeavours to produce it as cheaply as possible. Minimization of short-run costs The production function The third layer, concerning the determination of the most profitable size and equipment of plant, relates to what is called long-run profit maximization. The second layer, including the determination of the most profitable quantities of products to produce in any given plant, deals with what is called short-run profit maximization. It involves the problem of what is called short-run cost minimization. ![]() The first layer includes decisions about methods of producing a given quantity of the output in a plant of given size and equipment. ![]() The various decisions a business enterprise makes about its productive activities can be classified into three layers of increasing complexity. These include the relationship between the prices of commodities and the prices (or wages or rents) of the productive factors used to produce them and also the relationships between the prices of commodities and productive factors, on the one hand, and the quantities of these commodities and productive factors that are produced or used, on the other. The theory involves some of the most fundamental principles of economics. Theory of production, in economics, an effort to explain the principles by which a business firm decides how much of each commodity that it sells (its “outputs” or “products”) it will produce, and how much of each kind of labour, raw material, fixed capital good, etc., that it employs (its “inputs” or “factors of production”) it will use. SpaceNext50 Britannica presents SpaceNext50, From the race to the Moon to space stewardship, we explore a wide range of subjects that feed our curiosity about space!.Learn about the major environmental problems facing our planet and what can be done about them! ![]()
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