Economics 9

Production
 It is the process of USING RESOURCES TO PRODUCE GOOD AND SERVICES that satisfy the needs and wants of the
individuals and businesses.
Types of good that can be produced:
1. Consumer goods – goods that are SOLD DIRECTLY.
2. Producer goods – goods which are USED TO PRODUCE other goods.

Factors of Production
a) Land – ENCOMPASSES ALL NATURAL RESOURCES used in the production of goods.
b) Labor – all of the WORKS that the laborers and workers PERFORM at all levels, except the entrepreneur.
c) Capital – TOOLS AND MACHINERY used to produce goods and services.
d) Entrepreneur – a person with a MANAGERIAL ABILITY and willingness to accept risk in doing business.

Note:
o In order to achieve development of the economy, all factors of production should work together.
One factor alone cannot guarantee economic growth.
o Each factor should go hand in hand to ensure the success in the business.
o Production of goods and services are vital in the development of the country. Thus, all the factors
of production are essential in the development process.

Financial Capital – MONEY SPENT TO BUY MACHINERIES and other equipment to be used in production.
Captain of the Industry – a name called to an entrepreneur because he/ she organize, manage and control the factors of
production.

Payments Received by the Factors of Production:

 Rent – the payment for the USED OF LAND and other natural resources received by the LANDLORDS.
 Wages – the amount of money received by the WORKERS as payment for their services.
 Interest – payment received for the PRODUCTIVE SERVICES of CAPITAL.
 Profit – entrepreneur received this payment after deducting all his/her expenses in the operation of the business.
(Gross Profit (-) expenses = not profit; salary of the owner)

Production Function
 Shows the RELATIONSHIP OF PHYSICAL INPUTS and PHYSICAL OUTPUTS in a business or production.
 Can describe or illustrate the law of Variable Proportion (explains HOW MARGINAL OUTPUT CHANGES a single
input becomes varied while other inputs remain constant)

Inputs of Production
a) Raw Materials
b) Skills and Services of workers
c) Machineries, industrial plants
After using the Input production,
the produce goods is the OUTPUT
PRODUCT

1. Fixed Input – refers to the factors of production in business production that CANNOT IMMEDIATELY CHANGE in a
short run such as LAND, BUILDINGS or FACTORIES.
2. Variable Input – is the RESOURCES that can be CHANGED EASILY according to the DESIRED VOLUME OF
PRODUCTION, such as the NUMBER OF WORKERS, MACHINERIES, EQUIPMENTS and RAW MATERIALS.

THREE STAGES OF PRODUCTION

Fixed Inputs Variable Input Total Average Marginal
(FI) (VI) Production Production Product
Hectares of Number of (TP) (AP) (MP)
Land Workers (TP /VI)
1 1 12 12 -
1 2 30 15 18 Stage 1
1 3 49 16.33 19
1 4 51 12.75 9
1 5 58 11.6 7
1 6 63 10.5 5 Stage 2
 1 7 66 9.4 3
1 8 66 8.25 0
1 9 64 7.11 -2
Stage 3
1 10 58 5.8 -6

Stage 1 – Increasing Returns

 The stage that shows an increase in the total production as the number of workers increase.

Stage 2 – Decreasing returns

 Total production increases as the workers are added; but the marginal products decreases although it is still
positive. The principle of diminishing return states that TOTAL OUTPUT INCREASES BY ADDING VARIABLE INPUT
WHILE OTHER INPUT REMAINS CONSTANT.

Stage 3 – Negative Returns

 The addition of 9th and 10th worker has caused reduction in the total product caused reduction in the total product
because the marginal product (MP) becomes negative and total product decreases.
 It means adding more workers will not do any good for the production.
 Producer should be aware of this to avoid waste in resources.
 To get the marginal product: (30 – 12)/(2-1)

METHODS OF PRODUCTION

1. Mechanization
 Works in the factory or industry is done mostly by MACHINES rather than people.
 The used of power driven machine resulted in the increase in output per work.
2. Production Line
 The goods being produced are moved through a LINE OF WORKERS WHO PERFROM THEIR INDIVIDUAL
TASKS on the goods being manufactured.
3. Division of Labor
 Each work has an ASSIGNED TASK to perform.
 Production line and Division of labor are coordinated with each other.
 Workers are tasked to do certain jobs according to their SPECIALIZATION.
4. Automation
 Work done by people are now done by Machines.
 People act as OVERSEER of the work done by machines.
 Many people lost their jobs because of this system.
5. Computerized Machine
 Highly sophisticated computer controlled machines are used to produce goods and services.

Note:
As technology advances, the method of production IMPROVES, which greatly affects the lives of people and
the economy.
The PRODUCTION COST
1. Fixed Cost
 Total Fixed Cost is the SUM OF ALL THE EXPENSES FOR THE PAYMENT OF THE FIX INPUT.
 It is CONSTANT in any level of production like rent for land, building which is used in business.
2. Variable Cost
 Cost go with the level of production, when the production is low, variable cost is also low; when the
production is high, variable cost is also high.
 Costs can be controlled by the businessman like payment for the electric and water bills, taxes, wages for
non – regular and contractual workers and others are also known as the total variable cost.
3. Total Cost
 The TOTAL EXPENSES IN PRODUCING GOODS and SERVICES are called TOTAL COST.

COST FOR EVERY PRODUCT

1. Average Fixed Cost
 The cost for every product that is based on the total fixed cost.
2. Average Variable Cost
 If the total variable cost is divided into the number of produced goods, the cost for every product can be
computed.
 The cost of every product depends on the variable cost.
3. Average Cost/Average Total Cost
 This cost gives the produces an idea in SETTING THE PRICE of the product in the market.
4. Marginal Cost
  Cost for every ADDITIONAL PRODUCT to be made.
 It helps the producers in determining how much the cost of every additional products.

Production Cost in a Short – run Market Period

Total Total Fixed Total Total Cost Average Average Average Marginal
Product Cost Variable Fixed Cost Variable Total Cost Cost
(TP) (TFC) Cost (TVC) (AFC) Cost (AVC) (ATC)
O 40 0 40 0 0 0 -
1 40 20 60 40 20 50 10
2 40 31 71 20 15.5 35.5 11
3 40 43 83 13.3 14.33 27.63 12
4 40 58 98 10 14.5 24.5 15

Formula
 TC = TFC + TVC  ATC = AVC + AFC
 AFC= TFC / TP  MC = TC2 – TC1
 AVC= TVC/TP

Miscellaneous Cost
1. Explicit Cost
 PAYMENT MADE FOR OTHERS as a cost of operating the business.
2. Implicit Cost
 Cost RELATED TO PAYMENT RECEIVED BY THE OWNER of the business.
 The owner receives payment for the rented building owned by the businessman himself.
3. Opportunity Cost
 Giving something for alternative is the opportunity cost.
 It means SACRIFICING ONE PARTICULAR RESOURCE, which provides an income to the owner if its use was
not given up.
 Computed to determine the status of the present business, weather it is making profit or not.

Different Types of Industry

1. Small Scale Industry

a) Cottage Industry
 A small scale industry that is usually BASED AT HOME
 It produced handmade products
 Workers use simple machines and equipment.
 RA 8289 ELIMINTATED THE TERM COTTAGE INDUSTRY – used the term SMALL ENTERPRISES.
 Small Enterprise – defined as ANY BUSINESS ACTIVITY ENGAGED IN INDUSTRY, AGRIBUSINESS or
service.
2. Medium Scale
 The capital is much bigger than the small scale industry, which is not more than 20 million pesos.
 Many Filipino industry businessmen belong to this group.

3. Large Industry
 This industry use heavy equipment and machineries, employ many workers and invest in more capital.
 Financial institutions provides higher and bigger loans to these kinds of industries.

Business Organizations
o Economic INSTITUTIONS that engage in the production and any business endeavors to earn profit

A. Sole Proprietorship
o This business organization is managed and owned by ONE INDIVIDUAL.
o It is advantageous due to the fact that there is ONLY ONE PERSON WHO MAKES DECISIONS IN THE
BUSINESS.
o LIMITED PRODUCTION is the disadvantage of this kind of business. – it is very difficult for the owner
of the business to expand due to limited resources and capital.
B. Partnership
o Organization of TWO OR MORE INDIVIDUALS who AGREE TO PUT THEIR MONEY AND PROPERTIES
TOGETHER to put up an industry or business.
 Kinds of Partnership
a. Limited Partnership
 The responsibility of one of the partners is LIMITED or there is a
SPECIFIC VALUE and amount of money involved and whatever his
contributions to the business will be lost in the case of
bankruptcy.
b. General Partnership
 All the obligations and debt of the business will be SHOULDERED
BY THE MEMBERS.
c. Silent Partnership
 Individuals give their capital share BUT DO NOT INTERFERE with
the management of the business.
C. Corporation
o Ownership of the organization is shared by MANY INDIVIDUALS known as STOCKHOLDERS.
o The stockholders are considered the owners of the business and they elect the members of the board
of directors.
o Multinational Corporation – business organizations which have branches ALL OVER THE WORLD.

D. Cooperative
o This is an organization in which the MEMBERS OWN THE STOCKS OF THE COOPERATIVE.
o The main objective is to serve its members than to gain profit.

DEMAND
 The concept of demand is focused on consumers’ behavior in the market.
 Refers to the number of goods and services that CONSUMERS ARE WILLING AND ABLE TO BUY at alternative prices
at a given period of time.
 The CAPACITY AND WILINGNESS of a consumer in buying certain product determines the demands.

1. Demand Functions
 The mathematical expression of the relationship of two variable (Quantity Demanded, the dependent
variable and the Price being the independent Variable.
2. Demand Schedule
 A table showing the units the consumer is willing and able to buy at an alternative prices.
3. Demand Curve
 It is the GRAPHICAL REPRESENTATION of the inverse relationship of price and quantity demanded.
4. Law of Demand
 It explains how people react every time the price changes in terms of the quantities of the product that
they purchase.
 States that: AS THE PRICE OF GOODS AND SERVICE INCREASES, THE QUANTITY OF THE PRODUCT OR
SERVICE OF THE BUYER IS WILLING TO BUY DECREASES, and if PRICES OF THE GOODS DECREASES, the
QUANTITY OF GOOD OR SERVICES THE BUYER IS WILLING TO BUY INCREASES.

Determinants of Demands

A. Population
 As the population increases, the number of consumers also increases, hence the demand of the
products may also increase.
B. Expectations
 This is a reaction to an expected event increases the demand for goods.
C. Income
 In determining the demand, the income of an individual plays a significant role.
 If the consumer receives a high income, she is capable of buying more products even if the price is
the same.
D. Preference
 Change in taste and preference for a particular brand affect the demand for products.
 Advertisement and endorsers somehow influence the consumer’s preferences.
E. Occasion
 Whenever there is a celebration, demand for products that are used for the occasion increases.
F. Price Related Products
 When the price of one good service increases, the demand for it will decrease. This depends on the
classification of goods. There are substitute goods which a person can buy in place of other goods.