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The Production Decision of an Individual Resource – Overall Significance
Production decisions frequently consist of aspects involving past, present and future decisions and events. Any production process today has an impact on the costs or sales in the future. This can be exemplified by the learning curve. With a learning curve, the cost of production of a company tends to reduce over a period. With workers and managers becoming increasingly more effective and experience at using equipment and plant that are available, there is a fall in production costs.
A firm, with a production carried out today, gains experience that helps reduce its expenses tomorrow. In such cases, the production of today can also be regarded as an investment in reducing costs in the future. The value of the specific investment needs to be accounted while comparing benefits and costs.
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Why is the production decision of an individual resource important?
Production decision of an individual resource includes comparisons between benefits and costs today with that of the future. The present discounted value concept can be used to make such comparisons.
For example, if you get an oil well on inheritance, you might not like to produce the entire oil today and would wish to save some of it for the future. Your production decision will depend on your anticipation that the price of oil will rise more in the future.
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