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 Costs Long-run Costs Production With Two Variable Inputs

The Concept of Production

Production - is the creation of any good or services for the purpose of selling to buyers. - in general, is any activity that creates value.

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.

Transforming Inputs into Outputs

Assembling the necessary inputs 2. Transforming the inputs through a recipe and technological process into outputs of goods and services.
1.

The various inputs consist of:

1. Capital- including raw materials ingredients,

supplies, tools, machinery, equipment, and physical facilities. 2. Labor- which combines and process and various materials. 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.

Categories of Production Activities

Unique-product production 2. Rigid mass production 3. Flexible mass production 4. Process or flow production
1.

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

Education as a Production Activity

inputs
1. teachers 2. administrator 3. buildings 4. supplies 5. equipment

PRODUCTION ACTIVITY

(the means of transforming inputs into outputs) - like an actual classroom activities

- educated children
Outputs

Rigid Mass Production

- Involves the manufacture of uniform products in large quantity using a well-defined, proven, and usually inflexible technology.

Flexible Mass Production

- processing is done into two stages: 1. Involves mass production of standardized components. 2. The components are assembled into final products that appear different from one another.

Process or Flow Production

- It is the continuous flow of the output.

Production Functions
- is the relationship between the amount of inputs required and the amount of output that can be obtained.

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 readily changed 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.

2. the time frame references - consist of the short-run and long-run. Short-run- refers to that time frame in which the input of one or more productive agents is fixed. - it also means any time period not long enough to allow the full effects of some changes to have operated. Long-run- is that period of time in which all inputs are variable.

Production with One Variable Input

- the number of inputs in any production process varies from one to about a hundred. Total, Average and Marginal Products - in the analysis of the production process , three important terms need to be cleared: 1. Total output(or total product)- refers to the total amount of output produced in physical units. 2. Average product- refers to the total output divided by the quantity of the variable inputs under consideration.

3.Marginal product- is the additional output attributed to the increase in the quantity of the variable inputs under consideration.

Total, Average, and Marginal Product of a Soap Manufacturer

Number of workers 1 2 Total output per day 50 Bars 125 Average production 50 Bars 62.5 Marginal product 50 Bars 75

3
4 5 6 7 8

220
320 410 490 560 610

73.3
80 82 81.6 80 76.2

95
100 90 80 70 50

9
10

640
630

71
63

30
-10

 What the graphs indicate

 The total output curve of a soap manufacturer

 The average product curve of a soap manufacturer

Figure 25,26.27

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

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

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

Cost of production of a soap manufacturer

(Table 11)
Bars of soap Total Cost (FC+VC) 100 200 2,500 3,000 Total Fixed Cost (FC) 1,000 1,000 Total Variable Cost (VC) 1,5000 2,000 Average Cost (AC) 25 15

300
400 500 600 700 800 900 1,000

3,500
4,000 4,500 5,000 6,000 7,000 8,000 10,000

1,000
1,000 1,000 1,000 1,000 1,000 1,000 1,000

2,500
3,000 3,5000 4,000 5,000 6,000 7,000 9,000

11.66
10 9 8.33 8.57 8.75 8.88 10

The total cost curve showing fixed cost and variable cost (figure 28)
100% 90% 80% 70% 60% 50% 40% 30%

20%
10% 0%

100

200

300

400

500 600 bar of soap

700

800

900

1,00

6 5 4 3 2 1 0 100 200 300 400 500 600 700 800 900 1000 Series 1

Series 2
Series 3

 Fixed cost - is that portion of the total cost which

remains unchanged even if the level of output changes. Rent is an example of a cost that remains constant regardless of the quantity produce d by the firm. Variable cost is that part of total cost that do vary with the amount of output produced. Wages and raw materials are examples of cost that are dependent on the volume of activity.

average, average variable cost and average cost (Table 12 )

Quality produced (QP)
100 Bars 200 300 400 500

Average Cost (AC)

25 15 11.66 10 9

Total Fixed Cost (TFC)

1,000 1,000 1,000 1,000 1,000

Average Fixed Cost (AFC)

10 5 3.33 2.5 2

Total Variable Cost (TVC)

1,000 2,000 2,500 3,000 3,500

Average Variable Cost(AVC) (TVC/QP)

15 10 8.33 7.5 7

600
700 800 900 1,000

8.33
8.57 8.75 8.88 10

1,000
1,000 1,000 1,000 1,000

1.66
1.43 1.25 1.11 1

4,000
5,000 6,000 7,000 9,000

6.66
7.14 7.5 7.77 9

The average cost curve, the average fixed cost curve and the average variable cost curve (figure 29)

Total cost and marginal cost (Table 13)

Quantity Production(QP) Bars of soap 100 Total Cost (TC) 2,500 Marginal Cost (MC) (Change in TC/Change in QP) 2,5000

200
300 400 500 600

3,000
3,500 4,000 4,500 5,000

500
500 500 500 500

700
800 900 1,000

6,000
7,000 8,000 10,000

1,000
1,000 1,000 2,000

Total cost and marginal cost (figure30)

Long- run costs

Fixed inputs that cannot be changed in the short run

can be increased (or decreased) in the long run, all costs, even those that are fixed in the short run, are variable in the long run. As such ,there is no total fixed cost curve in the long run.

Long-run average cost cost (figure31)

Point X = Lowest possible level of average cost at quality 1; Point Y = Lowest possible level of average cost at quality 2;

Point Z = Lowest possible level of average cost at quality 3;

Figure 31 graph

Production with two variable inputs

Production is most often done with several variable

inputs, only those that involve two variable inputs shall be considered. When there are two variable inputs, a useful analytical tool is the production isoquant is a curve or a locus of points showing all possible combination of inputs physically capable of producing a given level of output.

Production with two variable input

(figure 32)

Production outputs with two variable input (Table 14)

Output (in units) Labor 1,000 100 150 250 Input (in Units) Capital 500 300 200

350
500 2,000 150 250 350 450 550

150
100 550 350 250 200 175

Summary
Production is a major components of economics. It is

an activity aimed at providing supply to the market . Production involves activities that produce goods and services like vegetables, a new song, roads, meals, and motorcycles. Production is made possible by transforming inputs into outputs. Production may be categorized as either a unique product production, rigid mass production, flexible mass production, or process production.

WHAT IS MARKET? When buyers wishing to exchange money for a good or service are in contact with sellers wishing to exchange goods and services for money, a market exists. A market may be confined to a specific geographical area, like a certain town where buyers and sellers meet.

KINDS OF MARKET STRUCTURES

Market structure may be classified into the ff: 1. The pure or perfect types
Pure or perfect competition b) Pure or perfect monopoly
a)

2. The imperfect type a) Monopolistic competition b) Oligopoly

Pure or Perfect Competition

Pure or perfect competition is that market situation characterized by the following:
1.

2. 3.

4.

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 from any firm. The buyer and the seller are without power to change the going market price of the product. The absence of restraints of any kind is an important feature. In a purely competitive market, no artificial obstacles bar the entry and exit of firms. Buyers, sellers, and market owners have perfect knowledge of market condition. Business firms have knowledge of their revenues and cost functions.

Pure or Perfect Monopoly

Pure monopoly
is that market structure characterized by only one

product. The two perfect types of market structure are actually opposites. In terms of price determination alone, the price of the commodity is set by the competing firms and buyers in perfect competition market. In pure monopoly, is set by the sole seller or the monopolist.

Monopolistic Competition

Is that type of markets structure where there are large number of seller that produce similar products, but the products are perceived by buyers as different. Under this market structure, the produce of many sellers are identical and even interchangeable like rice and tomatoes.

Oligopoly
Is that market structure in which there are a limited

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

Output and Price under Pure Competition

Summary Characteristics of Market Structures

Market Model Number of Sellers Nature of Products Ease of Entry Control over Price Degree of Non Price Competition none Pure Competition Monopoly Very large number one homogeneous Very easy No control

Unique

Very Great difficult control

optional

Monopolistic Competition
Oligopoly

Many independent sellers

few

differentiated

easy

Limited control

intense

homogeneous

difficult Moderate control

strong

Demand Schedule of Farmer in Pure Competition

Price Quantity Demanded (in canvas)

100 200 300 400 500

600 700 800 900 1000

infinite infinite infinite infinite infinite

0 0 0 0 0

Demand Curve facing the Farmer in Pure Competition

Price and Output Determination under Monopoly

Since the monopolist is the sole seller in the market, his demand curve is also the industrys demand 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 Hypothetical Monopolist

Price per Unit 10 9 8 7 6 5 4 Quantity Sold 100 units 200 300 400 500 600 700

3
2 1

800
900 1000

Demand Curve of a Monopolist

Fixing the Monopoly Price

Three Possible Cost Situation

Constant Costs indicates that the per unit cost of the monopolist remains unchanged even if the quantity sold is increased or decreased. 2. Increasing Costs mean that the cost of production increases as quantity produced is increased. 3. Decreasing Costs the monopolists cost of production decreases as the quantity produced is increased.
1.

Price and Profits in a Monopoly with Constant Costs

Price per Units 1.00 2.00 Quantity Total Cost sold Receipts per Unit 900 800 900 1600 0.75 0.75 Total Cost 675 600 Monopoly Profits 225 1000

03.00
4.00 5.00 6.00

700
600 500 400

2100
2400 2500 2400

0.75
0.75 0.75 0.75

525
450 375 300

1575
1950 2125 2100

7.00
8.00 9.00 10.00

300
100 50 0

2100
800 450 0

0.75
0.75 0.75 0.75

225
75 37.50 0

1875
725 412.50 0

Price and Profits in a Monopoly with increasing Costs

Price per Unit
10 9 8 7 6 5 4 3

Quantity Sold
0 50 100 300 400 500 600 700

Total Receipts
0 450 800 2100 2400 2500 2400 2100

Cost per Total Unit Cost

0.50 0.55 0.60 0.65 0.70 0.75 0. 80 0.85 0 27.50 60 195 280 375 480 595

Monopoly Profits
0 422.50 740 1905 2120 2125 1920 1505

2 1

800 900

1600 900

0.90 0.95

720 855

880 45

Price and Profits in a Monopoly with Decreasing Costs

Price Quantity per Sold Unit 10 9 8 7 0 50 100 300 Total Receipts 0 450 800 2100 Cost per Unit 1.00 0.95 0.90 0.85 Total Monopoly Cost Profits 0 90 255 0 710 1845

47.50 402.50

6 5
4 3 2 1

500 600
700 800 900 1000

3000 3000
2800 2400 1800 1000

0.80 0.75
0.70 0.65 0.60 0.55

400 450
490 520 540 550

2600 2550
2310 1880 1260 450

Demand Schedule of an Oligopolist when he raises or lowers his Price

Price per Unit 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 Quantity Sold 100 200 300 400 500 550 600 650 700 Total Receipts 900 1600 2100 2400 2500 2200 1800 1300 700

Price Determination under Monopolistic Competition

The firm in a monopolistic Competition strives to Differentiate its products from that of its competitors. If it is successful in maintaining a sizable group of loyal customers, it will attempt to maximize profits, observing the law of supply and demand. If the profits generated by the firm are big enough, it will invite competitors. The ensuing moves by the competing firms will wipe out profits caused by price cutting and additional promotional expenses.