WHAT IS THE PRODUCER THEORY? MAIN FEATURES - CULTURE VOCABULARY - 2025

The theory of the producer is a part of microeconomics that addresses the behavior and dynamics from the business standpoint and production, as the preference and consumer demand according to a specific product or service.

Producer theory is considered the counterpart of consumer theory, also handled within microeconomics. In this case, they would be behaviors and dynamics from the customer's point of view.

Sometimes, when applying the producer theory, the behavior of companies is wrongly detailed, focusing on organizational and cultural aspects. This could not be applied to the general theory, since it would be too complex and not very illustrative concepts.

The theory of the producer focuses on market behavior and how the company acts based on its structure, cycles and movements.

Concepts

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

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

It should be noted that in microeconomics, the theory of the producer is always developed with a view to optimizing the manufacture and consumption of goods in the market.

It is the company in charge of carrying out all the planning, supervision and execution of all aspects around the theory in order to obtain practical results, which are beneficial as long as they are managed considering multiple economic variables.

Main features of the producer theory

1- Opportunity costs

One of the first scenarios that is evaluated from the theory of the producer is the opportunity costs, which are defined as the study of the prices and costs of the factors necessary for the manufacture and obtaining of the finished product.

It is an initial step for every company to evaluate its capabilities within a market before entering it through its 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 inputs necessary for the manufacture of the product; and an output or output, which would be the finished product.

The production functions have to do with the relationships between the amount of factors or inputs necessary for the manufacture of the product.

These functions include the raw material required, the processing machinery and the levels of wear and tear on the components in the process.

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

This breakdown of functional elements of production is normally synthesized by companies into two large groups.

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

3- Profit maximization

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

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

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

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

These profit maximization problems are dealt with in the business environment both 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 evaluation of both fixed and variable costs that inputs or input productive functions have in all production processes. This evaluation must be approached by companies with great care to guarantee the minimization of expenses in the field of production, and to maximize the benefits from commercialization.

Basically, a company manages its input functions in such 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 on these costs.

All the inputs that a company has already acquired and paid for, whose costs do not vary in the short term, are known as fixed cost inputs.

There are other cost variables, such as variable cost, which corresponds to the relationship between the variability of input costs and the level of business production. This is usually a factor whose change is always upward, although there may be exceptions.

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

One of the curves that have been considered of greater importance is the marginal cost curve. This allows to have a general perception of the productive development of a company.

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

Perceptions of marginal costs have become so important that a new system of study has been developed focusing mainly on the marginal economy and its impact on production systems and relations.

Producer theory and market structures

The producer theory also addresses the types of markets in which a company enters and the product it offers, in order to generate the best performance scenarios and adapt production processes to each one.

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

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

References

1. Furtado, C. (sf). External dependency and economic theory. Economic quarter, 335-349.
2. Intriligator, PJ (1973). Generalized Comparative Statics with Applications to Consumer Theory and Producer Theory. International Economic Review, 473-486.
3. Krugman, PR, & Wells, R. (2006). Introduction to economics: microeconomics. Reverte.
4. Lenzena, M., Murraya, J., & Sackb, F. (2007). Shared producer and consumer responsibility - Theory and practice. Ecological Economics, 27-42.
5. R., RR (1998). Distance Functions in Consumer and Producer Theory. In GS Färe R., Index Numbers: Essays in Honor of Sten Malmquist (pp. 7-90). New York: Springer, Dordrecht.