CHAPTER 6: PRODUCTION AND COST

PRODUCTS
REFERS TO ANY ECONOMIC ACTIVITY WHICH COMBINES
THE FOUR BASIC FACTORS OF PRODUCTION TO FORM AN
OUTPUT THAT WILL GIVE DIRECT SATISFACTION TO
CONSUMERS.
INPUTS
ARE THE COMMODITIES AND SERVICES THAT ARE USED
TO PRODUCE GOODS AND SERVICES.
OUTPUTS
ARE VARIOUS USEFUL GOODS AND SERVICES THAT
RESULT FROM THE PRODUCTION PROCESS AND ARE
EITHER OR EMPLOYED IN OTHER.
Technology : Labor Intensive or Capital Intensive
Technology
It is the body of knowledge applied to how goods are
produced.
Labor intensive
Utilizes more labor resource than capital resources.
Capital Intensive
Utilizes more capital resource than labour in the
production process.
 Short Run vs. Long Run
2 Types of Production Inputs
a. Fixed Inputs – any resources of the quantity of which cannot
be readily change when the market condition indicates that a
change in output is desirable.
b. Variable Inputs – a change of production units based on the
changes of additional cost of inputs.
Short Run – period of time that has a limited or there is a at least
one fixed inputs.
Long Run – is a period of time so long that all inputs are
considered.
Production Function
Is the functional Relationship between quantities of inputs
used in the production and output to be produced.
Total, Marginal and Average Products
Total Products – refers to the output produced after utilizing
fixed and variable inputs in the production process.
Marginal Products – is an extra output produced by additional
unit of input while other input remains constant.
MP = Change in Total Product (TP2 – TP1)
Change in labor inputs (iL2 – iL1)
Average Products – is simply defined as Total Products
over Total inputs used.

Hypothetical Production Schedule of T - Shirts

Inputs Total Marginal Average

(Labor) Products(TP Products Products
)
1 8
2 20
3 37
4 57
5 72
THE THEORY OF COST
IN A BUSINESS FIRM COSTS ARE HALF THE PICTURE. THE
OTHER HALF IS SALES OR TOTAL REVENUE.
COST REFERS TO ALL EXPENSES ACQUIRED DURING THE
ECONOMIC ACTIVITY OR THE PRODUCTION OF GOODS OR
SERVICES.
THE EQUATION EXPRESSED AS:
PROFIT = SALES – COSTS
OPPORTUNITY COST
IS THE AMOUNT THAT FIRM MUST PAY THE OWNER OF
THE FACTORS OF PRODUCTION IT EMPLOYS TO ATTRACT
THEM FROM THEIR BEST ALTERNATIVE USE.
Fixed Cost or Overhead
Are those expenses which are spent for the use of
fixed factors of production.

Variable Cost
Sometimes called prime cost, are those expenses
which change as a consequence of a change in
quantity of output produced.
Are consists of Direct Materials and Direct Labor
which are necessary for efficiency of production.
 Total Fixed Cost, Total variable Cost and Total Cost
As production expands in the short run, Costs are divided into 2 basic
categories
Total Cost = Total Fixed Cost and total Variable Cost

Average Costs: Average Fixed Costs, Average Variable Costs and

Average Total Costs
Formula:
AFC = FC / Q
AVC = VC / Q
ATC = TC / Q or AFC + AVC
Marginal Cost
Is the cost of producing one additional unit of
output.
Marginal Analysis
Ask how much it cost to produce an additional unit
of output.
Formula
Marginal Cost = Change in Total Cost
Change in Quantity
 SHORT RUN COST SCHEDULE (In Peso)

Q FC VC TC MC AFC AVC ATC

0 100 0
1 100 40
2 100 68
3 100 90
4 100 115
5 100 148
6 100 195
7 100 260
8 100 350
9 100 460
10 100 600
SEAT WORK
COST OF PRODUCTION

Q TFC TVC TC MC AFC AVC ATC

78 420 525
112 798
265 936
339 1256
477 2799
582 3008
665 4288
780 5367
920 6249