Production costs and production costs: an introduction to the most important economic concepts.

Today we will talk about some of the most important concepts of economic theory, without proper understanding of which no economist-professional will be able to work: the topic of this article will be the costs of production and the cost of production. These two concepts are closely related, because costs are the basis for the formation of production costs.

To begin with, we will understand the concepts:

Production costs are all costs that are associated with the production of products in the enterprise, and which must be covered for profit. Depending on the approach to accounting, administrative costs, selling costs , financial costs, and others may also be included in production costs. However, the classical economic theory considers production costs as a combination of all the costs that are necessary to ensure the production process.

The cost price is the amount of costs that an enterprise must incur to produce a unit of output. From the two above definitions it is clear that the costs of production and the cost of production are inextricably linked, and the cost price is simply a cost per unit of output.

It is also worth considering the types of costs that are considered in economic analysis. Some believe that such a classification of costs can not be applied to real enterprises. Although this model is in many respects abstract, it still shows some important aspects that any firm faces sooner or later.

Constant costs are the costs that an enterprise incurs regardless of how many products it produces. These include the costs of maintaining premises, the payment of workers with a fixed rate, depreciation of fixed assets, and others.

Variable production costs are costs, the magnitude of which is related to the volume of output produced by the enterprise. Variable costs include the cost of raw materials necessary for the manufacture of finished products, the payment of employees with a piece-rate scheme of payment, the cost of electricity by machines and so on.

Limit costs - is the amount of incremental costs that occurs when manufacturing an additional unit of production. This indicator is especially important, since its comparison with the marginal revenue (revenue that the enterprise receives for the sold additional unit of production) gives an important indicator of profitability of additional production, on the basis of which a decision is made to expand production volumes.

The costs of production and the cost of production are widely used in the analysis of profitability and payback of the enterprise. However, do not think that it is profitable for an enterprise to work only if it makes a profit. We must not forget about the fixed costs that will be necessary to cover even if the production volume is zero. Therefore, it is necessary to carefully analyze the costs of production and the cost of production, taking into account all possible factors that may affect the economic state of the enterprise. However, in general, you can always apply this rule: the lower the costs of production and the cost of products and the higher the market price of the products sold, the higher the profit will be received by the owner of the enterprise, which means that the more efficiently it works.

We hope that this article has helped you to understand the most important economic concepts. Of course, we gave a general information on the "Cost and production costs", however, it is enough to conduct a simple economic analysis.