Producer theory Main features market structures

Producer theory is part of microeconomics that addresses behavior and dynamics from a business and production point of view, such as consumer preference and demand for a specific product or service.

The producer theory is considered the counterpart of the consumer theory, also treated in microeconomics. In this case, it would be about behaviors and dynamics from the customer‘s point of view.

Sometimes, when applying the producer theory, the behavior of companies is wrong, detailing the organizational and cultural aspects. This could not be applied to the general theory, as it would be very complex concepts and not very illustrative.

Producer theory focuses on market behaviors and how the company acts based on its structure, cycles, and movements.

concepts of producer theory

The producer theory investigates, among other things, the supply and demand around a product or several in a market with certain characteristics. It also considers the behavior of producers in the face of specific economic scenarios.

This theory also works on how factors of production can be efficiently combined to manufacture and obtain goods.

Note that in microeconomics, producer theory is always developed with the aim of optimizing the manufacture and consumption of goods on the market.

It is the company in charge of carrying out all the planning, supervision and execution of all aspects of the theory for the practical achievement of its results, beneficial as long as they are managed considering multiple economic variables.

Main features of producer theory

1- Opportunity costs

One of the first scenarios evaluated from the producer theory is the opportunity costs, defined as the study of prices and costs of the factors necessary to manufacture and obtain the finished product.

It is an initial step for all companies to assess their capabilities within a market before entering that market through their first batch of products.

2- Production functions

The production system of a good is seen as a chain through which there is an input , which refers to the materials and supplies needed to manufacture the product; and an output , which would be the final product.

Production functions have to do with the relationships that exist between the amount of factors or inputs needed to manufacture the product.

These functions include the raw material needed, the processing machines and the levels of wear and tear suffered by components in the process.

Also included are intermediate products (essential in the production process acquired from third parties), the use of basic supplies such as water and electricity, and the human workforce, among other elements.

This division of the functional elements of production is normally summarized by companies in two large groups.

These are the work, representative of the work force and the requirement for its accomplishment; and capital, representing the investment necessary for the operation and maintenance of all essential factors in the production process.

3- Profit maximization

The constant search for an active company in the market will always be to maximize its benefits in relation to its production capacity.

Basically, this refers to the quest to minimize production costs in relation to the cost that the final product would have for the consumer.

This relationship is theoretically carried out through formulations and mathematical problems, but basically it can be understood as the objective of every company to discover that production costs are lower.

This is sought so that the benefits received from the commercialization of the final product are much greater, without affecting its quality.

These profit maximization problems are worked out in the business environment, in the short and long term, depending on the scope of the same company and the market in which they operate.

4- Cost curves

The cost curve is the assessment of the fixed and variable costs that inputs or input production functions have in any production process. This assessment must be approached by companies with the utmost care to ensure that costs in the field of production are minimized and the benefits derived from commercialization are maximized.

Basically, a company manages its input functions in a way that it can perceive its costs in the short, medium and long term, as well as its incidence in the increase or decrease of expenses in these costs.

All inputs that a firm has already purchased and paid for, whose costs do not change in the short run, are known as fixed -cost inputs .

There are other cost variables, such as variable cost, which corresponds to the relationship between the cost variability of inputs and the level of commercial production. Generally, this is a factor whose change is always upward, although exceptions may occur.

The average cost curve is the one with the greatest dynamism, ascending and descending, since it addresses the medium-term changes in the cost of each product in relation to the level and production capacity of each company.

One of the most important curves is the marginal cost curve. This allows to have a general perception of the productive development of a company.

The marginal curve deals with the production costs of a finished product according to the productive capacities of a previous cycle. This is related to the total cost curve and basically evaluates the current production level with a previous capacity, in order to be able to see in more detail the incidences in the increase or decrease of the costs of each function.

Perceptions of marginal costs became so important that a new system of study was developed, focusing primarily on marginal economics and its impact on production systems and relations.

Producer theory and market structures

Producer theory also addresses the types of markets a company ventures into and the product it offers, in order to generate the best performance scenarios and adapt production processes to each.

Within microeconomics, the discipline in which the theory is inscribed, markets of perfect and imperfect competition are mainly managed.

The observation of the imperfect market of competition includes its different manifestations, which are monopoly, oligopoly and monopolistic competition.

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