What is the relationship between production and costs?  

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In order to understand the relationship between production and cost, we must first understand what production and cost mean in economics.

Production is a process in which various raw materials (inputs) are combined and/or transformed into finished goods or services and products that are ready for sale and consumption (outputs). The amount of money or means a company spends in order to produce and manufacture a certain amount of goods and services is known as cost. Costs, therefore, are the monetary values of products (goods and services) that both the production company (or companies) and the consumers buy.

The costs of production can be fixed (remaining constant regardless of other factors, such as the number of goods produced: for example, rent or salary), variable (changing proportionally with the changes in the economy, such as taxes), total (the sum of all costs), average (costs per unit of production), and marginal (costs incurred with the production of one additional unit of an output).

The relationship between production and cost is as follows: the larger and more complex the production process (more labor, more materials, etc.), the higher the costs. When a good or a service is efficiently produced on a larger scale but with fewer production costs, then we have economies of scale. The increased production makes it possible for the fixed costs to be spread over more product, resulting with cost advantages for the company. If these cost advantages are specifically beneficial to the company, then we have internal economies of scale, and if they benefit the entire industry, for example, then we have external economies of scale.

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