It is mostly useful for srtudents studying management during engineering.

1. Sarvajanik College of
Engineering and Technology
Subject: Management
Project By:
● Kumar Pawar - 130420109538
● Rangat Mehta – 130420109518
● Jay Kheni - 130420109513

2. Topics Covered in Presentation
Theory of Production
Concept of Costs
Break Even Analysys
- BEP

3. Theory of Production
Topics Covered:
1. Meaning of Production
2. Production Function
3. Factors of Production
4. Law of variable
proportions &
Law of returns to scale

4. Meaning of Production
Production is a process of combining various material inputs and immaterial
inputs (plans, know-how) in order to make something for consumption (the
output). It is the act of creating output, a good or service which has value
and contributes to the utility of individuals. Economic well-being is created in
a production process, meaning all economic activities that aim directly or
indirectly to satisfy human needs. The degree to which the needs are
satisfied is often accepted as a measure of economic well-being.
The satisfaction of needs originates from the use of the commodities which
are produced. The need satisfaction increases when the quality-price-ratio of
the commodities improves and more satisfaction is achieved at less cost.
Improving the quality-price-ratio of commodities is to a producer an essential
way to enhance the production performance but this kind of gains distributed
to customers cannot be measured with production data

5. Production Function
The production function is the relationship between the maximum
amount of output that can be produced and the inputs required to
make that output. Put in other way, the function gives for each set
of inputs, the maximum amount of output of a product that can be
produced. It is defined for a given state of technical knowledge (If
technical knowledge changes, the amount of output will change.)
A production function is a model (usually mathematical) that relates
possible levels of physical outputs to various sets of inputs, eg.
Q = f (Labour, Kapital, Land, technology, . . . ).
To simplify the world, we will use two inputs Labour (L) and Kapital
(K)
so,
Q = f (L, K, technology, ...)

6. Factors of Production
According to classical economics there
are 3 factor of production and they are:
● Land or Natural Resource: Naturally occurring
goods like water, air, soil, minerals, flora and fauna that
are used in the creation of products. The payment for
use and the received income of a land owner is rent.
● Labor: human effort used in production which also
includes technical and marketing expertise. The
payment for someone else's labor and all income
received from ones own labor is wages. Labor can also
be classified as the physical and mental contribution of
an employee to the production of the good(s).
● The Capital Stock: human-made goods which are
used in the production of other goods. These include
machinery, tools, and buildings.

7. Law of variable proportions &
Law of returns to scale
Under Law of variable proportion: only one variable input varies all other variable
kept constant. Under Law of Return to Scale: All the variable inputs varies except
the enterprise. Law of variable proportion is for short period; law of return to scale is
for long period. Law of variable proportion shows the relationship if one variable
input increase (eg: Labour) by keeping all other variable constant; total product and
marginal product increase upto a certain point after that it will increase at a
diminishing rate. it shows in three stage first increase then constant and then
decrease. Law of return to scale shows the relationship between inputs and output
at three different stages: 1. output increase more than inputs, 2. output and input
are constant, 3. output is less than proportionate input.

8. Concept of Cost
Topics Covered:
● What is Cost?
● Short run & Long run
cost
● Fixed & Variable cost
● Total & Average cost
● Marginal & Opportunity
cost

9. What is Cost?
An amount that has to be paid or given up in order to get
something.
In business, cost is usually a monetary valuation of (1) effort,
(2) material, (3) resources, (4) time and utilities consumed,
(5) risks incurred, and (6) opportunity forgone in production
and delivery of a good or service. All expenses are costs, but
not all costs (such as those incurred in acquisition of an
income-generating asset) are expenses.

10. Short run & Long run Cost
Short run cost:
All production in real time occurs in the short
run. The short run is the conceptual time
period in which at least one factor of
production is fixed in amount and others are
variable in amount. Costs that are fixed, say
from existing plant size, have no impact on a
firm's short-run decisions, since only variable
costs and revenues affect short-run profits.
Such fixed costs raise the associated short-run
average cost of an output long-run average
cost if the amount of the fixed factor is better
suited for a different output level. In the short
run, a firm can raise output by increasing the
amount of the variable factor(s), say labor
through overtime.
A generic firm already producing in an industry
can make three changes in the short run as
response to reach a posited equilibrium:
● increase production
● decrease production
● shut down
Long run cost:
In the long run, firms change production levels
in response to (expected) economic profits or
losses, and the land, labor, capital goods and
entrepreneurship vary to reach associated
long-run average cost. In the simplified case of
plant capacity as the only fixed factor, a
generic firm can make these changes in the
long run:
● enter an industry in response to
(expected) profits
● leave an industry in response to losses
● increase its plant in response to profits
● decrease its plant in response to losses.

11. Fixed & Variable cost
Variable Cost:
Variable costs are costs that change in proportion
to the good or service that a business produces.
Variable costs are also the sum of marginal costs
over all units produced. They can also be
considered normal costs. Fixed costs and
variable costs make up the two components of
total cost. Direct costs, however, are costs that
can easily be associated with a particular cost
object. However, not all variable costs are direct
costs. For example, variable manufacturing
overhead costs are variable costs that are
indirect costs, not direct costs. Variable costs are
sometimes called unit-level costs as they vary
with the number of units produced.
Direct labor and overhead are often called
conversion cost, while direct material and direct
labor are often referred to as prime cost.
Fixed Cost:
In economics, fixed costs, indirect costs or
overheads are business expenses that are
not dependent on the level of goods or
services produced by the business.[1]
They tend to be time-related, such as
salaries or rents being paid per month,
and are often referred to as overhead
costs. This is in contrast to variable costs,
which are volume-related (and are paid
per quantity produced).
In management accounting, fixed costs
are defined as expenses that do not
change as a function of the activity of a
business, within the relevant period. For
example, a retailer must pay rent and
utility bills irrespective of sales.

12. Total & Average cost
Total cost:
In economics, and cost accounting, total
cost (TC) describes the total economic
cost of production and is made up of
variable costs, which vary according to the
quantity of a good produced and include
inputs such as labor and raw materials,
plus fixed costs, which are independent of
the quantity of a good produced and
include inputs (capital) that cannot be
varied in the short term, such as buildings
and machinery. Total cost in economics
includes the total opportunity cost of each
factor of production as part of its fixed or
variable costs.
The rate at which total cost changes as
the amount produced changes is called
marginal cost. This is also known as the
marginal unit variable cost.
Average cost:
In economics, average cost or unit cost
is equal to total cost divided by the
number of goods produced (the output
quantity, Q). It is also equal to the sum
of average variable costs (total variable
costs divided by Q) plus average fixed
costs (total fixed costs divided by Q).
Average costs may be dependent on
the time period considered (increasing
production may be expensive or
impossible in the short term, for
example). Average costs affect the
supply curve and are a fundamental
component of supply and demand.

13. Marginal & Opportunity cost
Marginal cost:
In economics and finance, marginal cost is
the change in the total cost that arises
when the quantity produced has an
increment by unit. That is, it is the cost of
producing one more unit of a good. In
general terms, marginal cost at each level
of production includes any additional costs
required to produce the next unit. For
example, if producing additional vehicles
requires building a new factory, the
marginal cost of the extra vehicles includes
the cost of the new factory. In practice, this
analysis is segregated into short and long-run
cases, so that over the longest run, all
costs become marginal. At each level of
production and time period being
considered, marginal costs include all
costs that vary with the level of production,
whereas other costs that do not vary with
production are considered fixed.
Opportunity cost:
In microeconomic theory, the opportunity cost of a
choice is the value of the best alternative forgone, in
a situation in which a choice needs to be made
between several mutually exclusive alternatives
given limited resources. Assuming the best choice is
made, it is the "cost" incurred by not enjoying the
benefit that would be had by taking the second best
choice available. The New Oxford American
Dictionary defines it as "the loss of potential gain
from other alternatives when one alternative is
chosen". Opportunity cost is a key concept in
economics, and has been described as expressing
"the basic relationship between scarcity and choice".
The notion of opportunity cost plays a crucial part in
ensuring that scarce resources are used efficiently.
Thus, opportunity costs are not restricted to
monetary or financial costs: the real cost of output
forgone, lost time, pleasure or any other benefit that
provides utility should also be considered opportunity
costs.

14. Break Even Analysis
Meaning: The break-even level or break-even point (BEP) represents the sales
amount—in either unit or revenue terms—that is required to cover total costs (both
fixed and variable). Total profit at the break-even point is zero. Break-even is only
possible if a firm’s prices are higher than its variable costs per unit. If so, then each unit
of the product sold will generate some “contribution” toward covering fixed costs.
For example, if a business sells fewer than 200 tables each month, it will make a loss;
if it sells more, it will make a profit. With this information, the business managers will
then need to see if they expect to be able to make and sell 200 tables per month.
If they think they cannot sell that many, to ensure viability they could:
● Try to reduce the fixed costs (by renegotiating rent for example, or keeping better
control of telephone bills or other costs)
● Try to reduce variable costs (the price it pays for the tables by finding a new
supplier)
● Increase the selling price of their tables.
Any of these would reduce the break-even point. In other words, the business would
not need to sell so many tables to make sure it could pay its fixed costs.

15. Objective of BEP
The main objective of break-even analysis is to find
the cut-off production
volume from where a firm will make profit. Let
s=selling price per unit
v=variable cost per unit
FC=fixed cost per period
Q=volume of production
The total sales revenue (S) of the firm is given by the
following formula:
S = s ́Q
The total cost of the firm for a given production volume
is given as
TC = Total variable cost + Fixed cost
= v ́Q + FC
The linear plots of the above two equations are shown
in figure. The intersection point of the total sales
revenue line and the total cost line is called the break-even
point

16. Any Queries?