Module 5: Production and Profit

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Overview

This module builds on physical production by introducing costs of production and revenue from the sale of output.  Most factors of production, or inputs, have a cost.  For example, labour must be paid a wage, and you have to pay John Deere or Massy Ferguson for your combine all at once, or in installments.  Even time has a cost – if you borrow money for your business, you must pay interest.  At the same time, the reason producers, manufacturers, and farmers are in business, is to make money.  The products and services they provide are sold at a certain price on the market.  The whole process seems very complicated, but we can make sense of it to determine the best combination of inputs given the costs of production.

We will begin with the production function and consider different costs of production, and how to introduce price to the analysis to graphically and mathematically determine the output that leads to the greatest profit, and where profits are negative.

Learning Objectives

Upon completion of this module, you will be able to:

  1. Illustrate how production is related to business
  2. Demonstrate how to incorporate costs into decision making
  3. Evaluate how price is incorporated into the model
  4. Use break-even analysis to find the optimal point of production
  5. Interpret current events that affect agriculture markets

Module Instructions

For this module you are required to:

  1. Read the Learning Material section of this module
  2. Read the internet article by S. Chand.
  3. Search for a news article to illustrate module theories

Required Readings

Chand, S. (2016). The Break-Even Analysis (explained with diagrams)| Economics. Retreieved from: http://www.yourarticlelibrary.com/economics/the-break-even-analysis-explained-with-diagrams-economics/29085/

Key Terms and Concepts

  • Break-even analysis
  • Break-even point
  • Fixed cost
  • Optimal point of production
  • Price
  • Profit
  • Sensitivity analysis
  • Total cost
  • Total revenue
  • Variable cost