Production, costs, and pricing - Definition and Overview

See also: record producer.

In microeconomics, production is the act of making things, in particular the act of making products that will be traded or sold commercially. Production decisions concentrate on what goods to produce, how to produce them, the costs of producing them, and optimizing the mix of resource inputs used in their production. This production information can then be combined with market information (like demand and marginal revenue) to determine the quantity of products to produce and the optimum price to charge.

(In macroeconomics, production is measured by gross domestic product and other measures of national income and output.)

Aspects of production and pricing theory

• Production theory basics
  • production efficiency
  • factors of production
  • total, average, and marginal product curves
  • marginal productivity
  • isoquants
  • the marginal rate of technical substitution
• Economic rent
  • classical factor rents
  • Paretian factor rents
• Production possibility frontier
  • what products are possible given your resources
  • the trade-off between producing one product rather than another
  • the marginal rate of transformation
• Production function
  • inputs
  • diminishing returns to inputs
  • the stages of production
  • shifts in a production function
• Cost theory
  • the different types of costs
    • opportunity cost
    • accounting cost or historical costs
    • transaction cost
    • sunk cost
    • marginal cost
  • the isocost line
• Cost-of-production theory of value
• Long-run cost and production functions
  • long-run average cost curves
  • long-run production function and efficiency
  • returns to scale and isoclines
  • minimum efficient scale
  • plant capacity
• Economies of density
• Economies of scale
  • the efficiency consequences of increasing or decreasing the level of production
• Economies of scope
  • the efficiency consequences of increasing or decreasing the number of different types of products produced, promoted, and distributed
• Optimum factor allocation
  • output elasticity of factor costs
  • marginal revenue product
  • marginal resource cost
• Pricing
  • various aspects of the pricing decision
• Transfer pricing
  • selling within a multi-divisional company
• Joint product pricing
  • price setting when two products are linked
• Price discrimination
  • different prices to different buyers
  • types of price discrimination
  • yield management
• Price skimming
  • price discrimination over time
• Two part tariffs
  • charging a price comprised of two parts, usually an initial fee and an ongoing fee
• Price points
  • the effects of a non-linear demand curve on pricing
• Cost-plus pricing
  • a markup is applied to a cost term in order to calculate price
  • cost-plus pricing with elasticity considerations
  • cost plus pricing is often used along with break even analysis
• Rate of return pricing
  • calculate price based on the required rate of return on investment, or rate of return on sales
• Profit maximization
  • determining the optimum price and quantity
  • the totals approach
  • the marginal approach

See also

microeconomics, Important publications in production theory