PRODUCTION

AND COST
ANALYSIS
Trogo, Cyryll Ice
Diamante, Rickony
Huerto, Andrea
Production
Production is the transformation of
inputs to outputs.
Production Function
The production function shows the
relation between input changes and
output changes. It is a mathematical
equation to find out the different variables
in computing or solving production
function.
The production function is
expressed as:

Q = f (K, L, etc.)
SHORT-RUN VS.
LONG-RUN
ANALYSIS OF
PRODUCTION
The Short-Run

The short-run analysis is using one factor

variable of production that cannot be changed.
The Long-Run

The long-run analysis connotes that all factors

can be changed.
Hypothetical data of production with with one variable
input
Points Land Labor TP AP MP

A 1 0 0 0 0

B 1 1 4 4 4

C 1 2 10 5 6

D 1 3 18 6 8

E 1 4 24 6 6

F 1 5 28 5.6 4

G 1 6 30 5 2

H 1 7 30 4.29 0

I 1 8 28 3.5 -2

J 1 9 24 2.67 -4
PRODUCTION WITH ONE VARIABLE INPUT

The quantity of only one input, keeping the

other input quantities unchanged, then the
quantity of its output obtained at any quantity
of the variable input .
PRODUCTION WITH TWO VARIABLE INPUTS
• ISOCOST- shows the different combinations of capital and labor
that producers can purchase or hire their total outlay and the
other factors.
K

ISOCOST CURVE

L
 SHIFTING OF ISOCOST
K
To the right- increase in total outlay
To the left- decease in total outlay

INITIAL ISOCOST

L
• ISOQUANT- shows the different combinations of capital and labor which yield the
same level of output. Isoquants have 3 characteristics; negatively slope, convex to
the origin and it do not intersect.

Shift to the right- increase in production

Shift to the left- decrease in production
 Isoquant 1 Isoquant 2 Isoquant 3
POINTS LABOR CAPITAL LABOR CAPITAL LABOR CAPITAL
A 2 22 4 26 6 30
B 1 16 3 20 5 24
C 2 10 4 14 6 18
D 3 6 5 10 7 14
E 4 4.6 6 8.4 8 12.4
F 5 3.6 7 7 9 11
G 6 3.2 8 6.4 10 10.6
H 7 3.6 9 7 11 11
MARGINAL RATE OF TECHNICAL SUBSTITUTION (MRTS)

It is the amount of capital that a producer is willing to give up in

exchange for labor.
 ISOQUANT 1 ISOQUANT 2 ISOQUANT 3
POINTS
LABOR CAPITAL MRTS LABOR CAPITAL MRTS LABOR CAPITAL MRTS

A 2 22 4 26 6 30
B 1 16 3 20 5 24
C 2 10 6 4 14 6 6 18 6
D 3 6 4 5 10 4 7 14 4
E 4 4.6 1.4 6 8.4 1.6 8 12.4 1.6
F 5 3.6 1 7 7 1.4 9 11 1.4
G 6 3.2 0.4 8 6.4 0.6 10 10.6 0.4
H 7 3.6 9 7 11 11
• TOTAL OUTPUT (or total product)
The total amount of output produced in physical units
such as bags of fertilizer, bottles of vinegar, or pairs of
shoes.
• AVERAGE PRODUCT
The total output divided by the quantity of the
variable
inputs under consideration.
• MARGINAL PRODUCT
The additional output attributed to the increase in the
quantity of the variable inputs under consideration.
The Law of Diminishing Marginal Return
States that in a production process, as one input variable is
increased, there will be a point at which the marginal per unit
output will start to decrease.
Type of Resource

•Fixed Resource – there’ s no change as you produce

more.

•Variable Resource – do change with the more that you

produce.
The Law Of Diminishing Marginal Returns is usually
represented in graphical form using three curves:

• Marginal Product Curve - shows the change in amount of

production per input.

• Total Product Curve - shows the change in production with

progressive increase in one production input.

• Average Product Curve - shows the change in average

production.
Labor Total Product Marginal Average
(No. Pizza) Product Product
0 0 - -
1 5 5 5
2 15 10 7.5
3 20 5 6.67
4 22 2 5.5
5 22 0 4.4
6 18 -4 3
 Making Pizza
25

20

Total Product
Total Product

15

10

5
STAGE II
STAGE I STAGE III
0
0 1 2 3 4 5 6
Labor
 Point of Maximum
Yield
20
MP Point of Diminishing
AP Returns
15

10
AP
MP
5

0
0 1 2 3 4 5 6

-5
STAGE I Labor
STAGE II STAGE III
Three Stage of production
Stage 1 : Most Productive
- Input leads to productive return. It pays to invest more time
and effort.
Stage 2 : Diminishing Returns
- Each added input leads to a decreasing rate of output. It’s
best to stop somewhere within this phase.
Three Stage of production
Stage 3 : Negative Returns
- Never get here. Not only do you not get a return for your
effort, you decrease your overall output.
ACCOUNTING COSTS
VS. ECONOMIC COSTS
Accounting Costs
Accounting costs, also known as explicit
costs, are costs that involve money being
spent.
Economic Cost
Economic costs include accounting costs and implicit
costs. Implicit costs, also known as opportunity costs, do
not involve spending money; rather, they involve
opportunities to earn money that are abandoned in a
financial decision.
IMPLICIT COST VS. EXPLICIT
COST
Implicit Costs
The value of inputs being owned by the firm and used in its own
production process.
Explicit Costs
 The actual expenses of the firm in purchasing and hiring the
inputs it needs.
 Are out-of-pocket costs for a firm—for example, payments
for wages and salaries, rent, or materials.
SHORT-RUN COSTS VS. LONG-
RUN COSTS
Short-run Cost
Short run for a firm is a time horizon when one input is held
constant. To analyze the short run cost it is essential to fix the
level of capital and study the changes in the quantity of labor
hired.
TOTAL COST
• TC= TFC + TVC AVERAGE COST 
• ATC= TC/Q
Where:  • AFC= TFC/ Q
• TC- total cost • AVC= TVC/Q
• TFC- total fixed cost
• TVC- total variable cost Where: 
• ATC- average total cost per unit of output.
MARGINAL COST • TC- total costs
• MC= TC/Q  • Q- quantity
• AFC- average fixed cost
Where:  • TFC- total fixed cost
• MC- marginal cost or change in total cost • AVC- average variable cost or variable cost
• MV- marginal variable cost or change in per unit of output
total variable cost.  • TVC-total variable cost
• Q- quantity of output
Long-Run Costs
• The cost having the long term implications in the production 
process. Fixed inputs in the short run can be increased (or
decreased) in the long run. To increase capacity, additions to
building, land, machinery, or even managerial skills may be
made. 
BUSINESS PROFIT VS.
ECONOMIC PROFIT
Business profit
The difference between business income (revenue) and the
business expense (costs): that is all selling price minus all the
cost of making and selling the goods and services including
taxes gives the profit
Economic Profit
Economic profit is the profit from producing goods and
services while factoring in the alternative uses of a company's
resources.
Similar to accounting profit in that it deducts explicit costs
from revenue.
PROFIT OF THE FIRM IN THE SHORT RUN &
SHUTDOWN POINT
• In the short run, a monopolistically competitive firm maximizes
profit or minimizes losses by producing that quantity that
corresponds to when marginal revenue = marginal cost. If
average total cost is below the market price, then the firm will
earn an economic profit.
PROFIT OF THE FIRM IN THE SHORT RUN &
SHUTDOWN POINT
• A shutdown point is a level of operations at which a company
experiences no benefit for continuing operations and
therefore decides to shut down temporarily (or in some cases
permanently). It results from the combination of output and
price where the company earns just enough revenue to cover
its total variable costs.
• P=AVC
PROFIT OF THE FIRM IN THE SHORT RUN &
SHUTDOWN POINT

A competitive firm takes the market price as constant. If it

wants to maximize the optimum level of production in the short
run is when it's marginal cost is equal to it's price.
PRICE IS GREATER THAN AVERAGE TOTAL COST (P>
ATC)

The optimum output of the firm in the short-run is given by Q,

where P= MC. We use ATC to find the total cost in order to
copute for the profit. In this case the firm is warning profits
because price is greater than the cost given by the shaded
region.
PROFIT OF THE FIRM IN THE SHORT RUN & SHUTDOWN
POINT
A shutdown point is a level of operations at which a company
experiences no benefit for continuing operations and therefore
decides to shut down temporarily (or in some cases
permanently). It results from the combination of output and
price where the company earns just enough revenue to cover its
total variable costs.
• P=AVC
THANK YOU !!!