Production, Cost and Revenue

Sectors of production

Production is the process of creating goods and services to meet human wants. Production activity is divided into three sectors:

• Primary sector — produces raw materials directly from nature, such as agriculture, mining and fishing.
• Secondary sector — processes raw materials into finished goods, such as manufacturing and construction.
• Tertiary sector — provides services, such as banking, transport, education and tourism.

Cost of production

In the short run, a firm’s costs fall into two types. Fixed cost is cost that does not change with the level of output, such as factory rent and fixed salaries. It must be paid even when nothing is produced. Variable cost changes with the level of output, such as the cost of raw materials and daily workers’ wages. Total cost is the sum of fixed cost and variable cost.

Revenue and profit

Total revenue is the total money a firm receives from sales. It is calculated by multiplying the price per unit by the quantity sold. Profit is the surplus of total revenue after total cost is deducted.

If total revenue exceeds total cost, the firm makes a profit. If total cost exceeds total revenue, the firm makes a loss. When TR equals TC, the firm is at its break-even point.

Factors of production

Every production process needs a combination of factors of production, namely land, labour, capital and the entrepreneur. Land supplies raw materials and space, labour contributes the workforce, capital covers machines and buildings, while the entrepreneur combines these three factors and bears the business risk. A firm must use these factors as efficiently as possible because each one involves a cost. The decision on how much to produce depends on comparing the expected total revenue with the total cost borne.