Reference no: EM133711179

Production of goods and services involves combination of factors of production, labor, capital, and natural resources. Measurement of productivity refers to evaluation of the efficiency of a production process, division and the organization as a whole. Productivity is measured as a ratio of the total output to the total inputs utilized to produce goods and services. Total production, average production, and marginal production are pertinent metrics in production. Total production refers to the volume of aggregate output produced by a specific amount of a factor of production, other factors kept constant. The total production will rise as the amount of the given factor, for example, labor increases (Rutherford, 2007).

Average production of a factor denotes the total output produced per unit of the factor used. It is the total production divided by the number of units of the factor used (Rutherford, 2007). On the other hand, marginal production of a given factor refers to the additional unit to total production achieved by use of an extra unit of the factor (Rutherford, 2007). In other words, marginal production is the change in total production as a result of a change in a factor, such as labor. Production and cost are intertwined. The level of production which is considered economical and therefore adopted by a firm must be compared with the costs and ascertained not to exceed the costs. Cost can be broken into total cost, average cost and marginal cost. Total cost refers to the aggregate economic cost of producing a good or service. It is constituted by variable, fixed and opportunity cost elements (Sexton, 2015). Average cost is the total cost divided by the total output, or the summation of average variable costs and average fixed costs. Marginal cost refers to the cost incurred to produce an extra unit of a product (Sexton, 2015). The three cost elements are important for making managerial decisions. These cost components are used in the theory of the firm to depict economies of scale which will yield decreasing average cost curves; dis-economies of scale yield increasing average cost curves. A firm which is considered to have optimum production is the one that has the minimum point of an average cost curve, where that curve is U-shaped (Rutherford, 2007). In making pricing decisions, marginal and average costs are used as basis. Firms employ formulas that link average cost and profit margin to arrive at the final price of a product/ service. Furthermore, efficient allocation of resources requires prices to be equated with marginal costs, in what is termed as marginal thinking (Sexton, 2015). For instance, a company may want to determine whether additional revenue obtained from raising production is higher than the marginal cost of production and therefore decide on the optimum way to allocate production resources.

Question: Thanks for the good post! You did well in definining the terms. But now, we need to apply these ideas. Where have you seen any of these measures of total, marginal or average production or cost used where you work or have worked? Have you seen any of these ideas utilized at any place you have worked?