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Discuss the concepts of total production, average production and marginal production in companies. Relate production to cost and discuss how the ideas of total cost, average cost and marginal cost are used in decision making in companies.

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Answer 1

The concept of Total Production, Average Production and Marginal Production.

It is considered in the best benefit for the firm to have a proper estimation about the amount if resources which would be required in the organisation to produce a given amount of goods. Thus, Total Production refers to the total amount of goods produced in the company which the given amount of resources and it helps the firms to tap how much of the raw materials are required to make the right amount of production.

To have the accurate knowledge about how much of a good can be produced by one unit of the input variable to be taken, organisations use Average Production concept. The quantity of the output produced per unit of the variable input and while keeping other inputs constant is called the average production.

Marginal Production is the concept used to describe the change which is seen in the Total Product while the additional unit of input. Thus, the amount of change in TP or the amount of production unit change in relation with the change in the input quantity refers to the Marginal Production concept.

Concept of Total Cost, Average Cost and Marginal Cost:

Total Cost refers to the total amount of cost being the variable and the fixed cost. The combination of all the cost which was put in the production of one unit of good refers to the total cost of the good.

Average Cost refers to the average expenses which were put on the production of unit of the product. Thus, the total amount of cost which was put in to produce the product divided by the number of units produced would give the average total cost or average cost of the product that was employed to make the product.

Marginal cost refers to the additional cost that is seen by adding one more unit of production. Thus, the extra cost added by producing one more unit of service of product gives the MC. The least would be the marginal cost, the beneficial it is for the company.

All the various concepts mentioned above helps in the critical decision making process. The production assigned by TP, AP or MP helps us in analysing how we can influence the production by changing the amount of variables or input used. The decision regarding the type of inputs and the quantity of inputs depends upon the production concept.

The selling price of the product is determined by the cost. Most of the companies determine the price of the product by analysing the various concepts of the costs TC, AC or MC to assign the best price of the product which is above the cost to earn profit. MC helps us in determining the additional cost we are incurring thus helps in taking the advantage of economies of scale at large. We should be critically use these concepts to make best decisions regarding production and selling.