Managerial Economics

Cost Approach Versus Resource Approach to Production Planning

The conventional approach to planning production is to start with the goods and services that a firm intends to provide and then decide what production configuration will achieve the intended output at the lowest cost. This is the cost approach to production planning.² Once output goals are set, the expected revenue is essentially determined, so any remaining opportunity for profit requires reducing the cost as much as possible.

Although this principle of cost minimization is simple, actually achieving true minimization in practice is not feasible for most ventures of any complexity. Rather, minimization of costs is a target that is not fully realized because the range of production ...