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Contents:

The Concept of Production Transforming inputs into outputs

Categories of production

Production Functions

Production with One Variable Input

Total, Average and Marginal Products

Costs of Production

Short-run CostsLong-run Costs

Production With Two Variable Inputs

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The Concept of ProductionProduction

- is the creation of any good or services for the purpose

of selling to buyers.- in general, is any activity that creates value.

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Examples of production activities: the farmer producing vegetables

the psychiatrist producing specialized service

the songwriter producing specialized service the department of Public Highways producing roads

a mother producing meals for her children

Suzuki Corp. producing motorcycles.

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Transforming Inputs into Outputs1. Assembling the necessary inputs

2. Transforming the inputs through a recipe and

technological process into outputs of goods andservices.

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The various inputs consist of:1. Capital- including raw materials ingredients,

supplies, tools, machinery, equipment, and physicalfacilities.

2. Labor- which combines and process and variousmaterials.

3. Land- where the space alloted for processing is

located.4. Entrepreneurial or Managerial talent- which

performs functions like supervision, planning,control, coordination and leadership.

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Categories of Production Activities1. Unique-product production

2. Rigid mass production

3. Flexible mass production4. Process or flow production

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Unique-product Production- this type of production activity has as its outputmade-to-order products and services.

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Education as a Production Activity

1. teachers

2. administrator

3. buildings

4. supplies

5. equipment

- like an actual classroom activities

- educated children

inputs

PRODUCTIONACTIVITY

Outputs

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Flexible Mass Production- processing is done into two stages:

1. Involves mass production of standardized

components.2. The components are assembled into final productsthat appear different from one another.

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Process or Flow Production- It is the continuous flow of the output.

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Production Functions- is the relationship between the amount of inputs

required and the amount of output that can beobtained.

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Analysis of the Production Process- in the analysis of the process of production, the ff.

must be considered:

1. the classes of inputs- inputs are classified as either fixed or variable.

Fixed input- is one whose quantity cannot be readilychanged when market conditions indicate that a

changed in output is desirable. Variable input- is one whose quantity can be readily

changed when a changed in output is desired.

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2. the time frame references

- consist of the short-run and long-run.

Short-run- refers to that time frame in which theinput of one or more productive agents is fixed.

- it also means any time period not longenough to allow the full effects of some changes tohave operated.

Long-run- is that period of time in which all inputsare variable.

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Production with One Variable Input

- the number of inputs in any production process variesfrom one to about a hundred.

Total, Average and Marginal Products

- in the analysis of the production process , threeimportant terms need to be cleared:

1. Total output(or total product)- refers to the totalamount of output produced in physical units.

2. Average product- refers to the total output divided bythe quantity of the variable inputs underconsideration.

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3.Marginal product- is the additional output attributedto the increase in the quantity of the variable inputs

under consideration.

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Total, Average, and Marginal

Product of a Soap ManufacturerNumber of

workersTotal output perday

Averageproduction

Marginalproduct

1 50 Bars 50 Bars 50 Bars

2 125 62.5 75

3 220 73.3 95

4 320 80 100

5 410 82 90

6 490 81.6 80

7 560 80 70

8 610 76.2 50

9 640 71 30

10 630 63 -10

T t l t t C f

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Total output Curve of soap

manufacturer figure 25

0

100

200

300

400

500

600

700

1 2 3 4 5 6 7 8 9 10

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Average Product curve of a soap

manufacturer figure 26

0

10

20

30

40

50

60

70

80

90

1 2 3 4 5 6 7 8 9 10

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The marginal Product curve of a

soap manufacturer figure 27

0

10

2030

40

50

60

70

80

90

100

1 2 3 4 5 6 7 8 9 10

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Cost of production In the analysis of the cost of production . The short-

run and the long-run time frames must be considered.

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Short-run costs- Producing the output requires a combination of fixedand variable costs.

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Fixed cost - is that portion of the total cost whichremains unchanged even if the level of outputchanges. Rent is an example of a cost that remains

constant regardless of the quantity produce d by thefirm.

Variable cost is that part of total cost that do varywith the amount of output produced. Wages and rawmaterials are examples of cost that are dependent onthe volume of activity.

C t f d ti f f t

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Bars of soap Total Cost

(FC+VC)

Total Fixed

Cost(FC)

Total Variable

Cost(VC)

Average Cost

(AC)

100 2,500 1,000 1,5000 25

200 3,000 1,000 2,000 15

300 3,500 1,000 2,500 11.66400 4,000 1,000 3,000 10

500 4,500 1,000 3,5000 9

600 5,000 1,000 4,000 8.33

700 6,000 1,000 5,000 8.57

800 7,000 1,000 6,000 8.75

900 8,000 1,000 7,000 8.88

1,000 10,000 1,000 9,000 10

Cost of production of a soap manufacturer(Table 11)

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The total cost curve showing fixed

cost and variable cost figure 28

0

1,000

2,0003,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1 2 3 4 5 6 7 8 9 10

average average variable cost and

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average, average variable cost and

average cost (Table 12 )Qualityproduced(QP)

AverageCost(AC)

Total FixedCost(TFC)

AverageFixed Cost(AFC)

TotalVariableCost (TVC)

AverageVariableCost(AVC)(TVC/QP)

100 Bars 25 1,000 10 1,000 15

200 15 1,000 5 2,000 10

300 11.66 1,000 3.33 2,500 8.33

400 10 1,000 2.5 3,000 7.5

500 9 1,000 2 3,500 7

600 8.33 1,000 1.66 4,000 6.66700 8.57 1,000 1.43 5,000 7.14

800 8.75 1,000 1.25 6,000 7.5

900 8.88 1,000 1.11 7,000 7.77

1,000 10 1,000 1 9,000 9

e average cos curve e

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e average cos curve, eaverage fixed cost curve and the

average variable cost curve (figure 29)

Php0.00

Php2.00

Php4.00Php6.00

Php8.00

Php10.00

Php12.00

Php14.00

Php16.00

Php18.00

Php20.00

1 2 3 4 5 6 7 8 9 10 11

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Total cost and marginal cost (Table 13)QuantityProduction(QP)Bars of soap

Total Cost(TC)

Marginal Cost (MC)(Change in TC/Changein QP)

100 2,500 2,5000

200 3,000 500

300 3,500 500

400 4,000 500

500 4,500 500

600 5,000 500

700 6,000 1,000

800 7,000 1,000

900 8,000 1,000

1,000 10,000 2,000

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Total cost and marginal cost (figure30)

0

1

23

4

5

6

7

8

9

10

1 2 3 4 5 6 7 8 9 10 11

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Long- run costs Fixed inputs that cannot be changed in the short run

can be increased (or decreased) in the long run, allcosts, even those that are fixed in the short run, are

variable in the long run. As such ,there is no total fixedcost curve in the long run.

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Production with two variable

inputs Production is most often done with several variable

inputs, only those that involve two variable inputsshall be considered.

When there are two variable inputs, a useful analyticaltool is the production isoquant is a curve or a locus ofpoints showing all possible combination of inputsphysically capable of producing a given level ofoutput.

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Production outputs with two

variable input (Table 14)Output (in units) Input (in

LaborUnits)Capital

1,000 100 500

150 300

250 200

350 150

500 100

2,000 150 550

250 350

350 250

450 200

550 175

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Production with two variable input(figure 32)

0

50

100150

200

250

300350

400

450

500

50 100 150 200 250 300 350 400 450 500 550 600

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WHAT IS MARKET?

When buyers wishing to exchange money for agood or service are in contact with sellers wishing toexchange goods and services for money, a marketexists.

Amarket may be confined to a specific

geographical area, like a certain town where buyersand sellers meet.

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KINDS OF MARKET STRUCTURESMarket structure may be classified into the ff:

1. The pure or perfect types

a)Pure or perfect competition

b) Pure or perfect monopoly

2. The imperfect type

a) Monopolistic competition

b) Oligopoly

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Pure or Perfect CompetitionPure or perfect competition is that market situationcharacterized by the following:1. The products of firms in the industry under consideration

are standardized . This means that they are identical or at

least so much alike that buyers do not mind buying fromany firm.

2. The buyer and the seller are without power to change thegoing market price of the product.

3. The absence of restraints of any kind is an important

feature. In a purely competitive market, no artificialobstacles bar the entry and exit of firms.4. Buyers, sellers, and market owners have perfect knowledge

of market condition. Business firms have knowledge oftheir revenues and cost functions.

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Pure or Perfect MonopolyPure monopoly

is that market structure characterized by only oneproduct.

The two perfect types of market structure are actuallyopposites. In terms of price determination alone, theprice of the commodity is set by the competing firmsand buyers in perfect competition market. In pure

monopoly, is set by the sole seller or the monopolist.

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Monopolistic Competition Is that type of markets structure where there are large

number of seller that produce similar products, but theproducts are perceived by buyers as different. Under thismarket structure, the produce of many sellers are identicaland even interchangeable like rice and tomatoes.

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Oligopoly Is that market structure in which there are a limited

number of firms competing for a given industry. Theproducts of oligopolists are homogeneous or identical.

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Summary Characteristics of Market

StructuresMarketModel

Number ofSellers

Nature ofProducts

Ease ofEntry

Controlover Price

Degree ofNon PriceCompetition

PureCompetition

Very largenumber

homogeneous Veryeasy

No control none

Monopoly one Unique Verydifficult

Greatcontrol

optional

MonopolisticCompetition

Manyindependentsellers

differentiated easy Limitedcontrol

intense

Oligopoly few homogeneous difficult Moderatecontrol

strong

Demand Schedule of Farmer in

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Demand Schedule of Farmer in

Pure Competition

Price Quantity Demanded(in cavan)

100 infinite

200 infinite

300 infinite400 infinite

500 infinite

600 0

700 0

800 0

900 0

1000 0

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Price and Output Determination

under MonopolySince the monopolist is the sole seller in the

market, his demand curve is also the industrysdemand curve. When he raises his prices, the quantity

he disposes will be reduced. When he lowers his price,the reverse happens.

Demand Schedule of a

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Demand Schedule of a

Hypothetical Monopolist

Price per Unit Quantity Sold

10 100 units

9 200

8 300

7 400

6 500

5 600

4 7003 800

2 900

1 1000

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Fixing the Monopoly Price Three Possible Cost Situation

1. Constant Costs indicates that the per unit cost ofthe monopolist remains unchanged even if thequantity sold is increased or decreased.

2. Increasing Costs mean that the cost of productionincreases as quantity produced is increased.

3. Decreasing Costs the monopolists cost ofproduction decreases as the quantity produced isincreased.

Price and Profits in a Monopoly

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Price and Profits in a Monopoly

with Constant CostsPriceperUnits

Quantitysold

TotalReceipts

CostperUnit

TotalCost

MonopolyProfits

1.00 900 900 0.75 675 225

2.00 800 1600 0.75 600 100003.00 700 2100 0.75 525 1575

4.00 600 2400 0.75 450 1950

5.00 500 2500 0.75 375 2125

6.00 400 2400 0.75 300 2100

7.00 300 2100 0.75 225 1875

8.00 100 800 0.75 75 725

9.00 50 450 0.75 37.50 412.50

10.00 0 0 0.75 0 0

Price and Profits in a Monopoly

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Price and Profits in a Monopoly

with increasing Costs

PriceperUnit

QuantitySold

TotalReceipts

Cost perUnit

TotalCost

MonopolyProfits

10 0 0 0.50 0 0

9 50 450 0.55 27.50 422.50

8 100 800 0.60 60 740

7 300 2100 0.65 195 1905

6 400 2400 0.70 280 2120

5 500 2500 0.75 375 2125

4 600 2400 0. 80 480 1920

3 700 2100 0.85 595 1505

2 800 1600 0.90 720 880

1 900 900 0.95 855 45

Price and Profits in a Monopoly

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Price and Profits in a Monopoly

with Decreasing CostsPriceperUnit

QuantitySold

TotalReceipts

CostperUnit

TotalCost

MonopolyProfits

10 0 0 1.00 0 0

9 50 450 0.95 47.50 402.50

8 100 800 0.90 90 710

7 300 2100 0.85 255 1845

6 500 3000 0.80 400 2600

5 600 3000 0.75 450 2550

4 700 2800 0.70 490 23103 800 2400 0.65 520 1880

2 900 1800 0.60 540 1260

1 1000 1000 0.55 550 450

Demand Schedule of an Oligopolist

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Demand Schedule of an Oligopolist

when he raises or lowers his PricePrice per Unit Quantity Sold Total Receipts

9.00 100 900

8.00 200 1600

7.00 300 21006.00 400 2400

5.00 500 2500

4.00 550 2200

3.00 600 1800

2.00 650 1300

1.00 700 700

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Price Determination under

Monopolistic CompetitionThe firm in a monopolistic Competition strives to

Differentiate its products from that of itscompetitors. If it is successful in maintaining a sizable

group of loyal customers, it will attempt to maximizeprofits, observing the law of supply and demand.

If the profits generated by the firm are bigenough, it will invite competitors. The ensuing moves

by the competing firms will wipe out profits caused byprice cutting and additional promotional expenses.

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