CONCEPT OF

PRODUCTION
Lecture 02 midterms
PRODUCTION

Transformation of inputs into outputs.

Inputs : factors of production (L, L, C, E)

 Fixed factor – remains constant regardless of the
volume of production.
 Variable factor – changes in accordance with the
volume of production.
Outputs : goods or services
 Economic goods – goods produced by man
 Free goods – produced by nature
PRODUCTION FUNCTION

- Shows the relationship between

quantities of various inputs used and
the maximum output that can be
produced with those inputs used per
unit of time expressed in a table, graph,
or equation

- Such technical relationship between

the application of inputs and the
resulting maximum obtainable output.
 SHORT-RUN VERSUS LONG-RUN
ANALYSIS OF PRODUCTION
Period of Production

 Short-run – refers to a period of time which

is too short to allow an enterprise to change
its plant capacity, yet long enough to allow a
change in its variable resources.

 Long-run – refers to a period of time which

is long enough to permit a firm or enterprise
to alter all its resources or inputs (both fixed
and variable factors).
 LAW OF DIMINISHING MARGINAL
RETURNS

“it states that when successive units of variable

input work with a fixed input beyond a certain
point the additional product produced by each
additional unit of variable, input decreases.”

- By holding one of the input constant except for

one and continually increasing the other input, a
point arrived wherein the rate in the increase of
output will fall.
- Output will decrease even if there is an increase in
one of the inputs
Marginal Product
– the additional product brought
by one additional unit of a
variable input.
POINTS (1) (2) (3) (4) (5)
LAND LABOR TP APL MPL

A 1 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
THE THREE STAGE OF PRODUCTION

STAGE 1
STAGE 2
ORIGIN until
the HIGHEST STAGE 3
From the highest
POINT OF APL. point of APL
Begins where
until MPL is MPL is ZERO
ZERO until its
NEGATIVE
RANGE.

From these three stages, at what stage

can the producer maximize its profit?
 RETURNS TO SCALE
“ what will happen to output if all inputs
are increased proportionally?”

 Increasing returns to scale – if doubling

all inputs cause output to increase more
than double
 Constant returns to scale – if doubling all
inputs causes doubling of output
 Decreasing returns to scale – if doubling
all inputs results to less than double output
 COST OF PRODUCTION
“Expenditure side of the firm”

Economic Costs
1. Total Cost – the sum total cost of production.
2. Fixed Cost – remains constant regardless of
the volume of production.
3. Variable Cost – changes in proportion to
volume of production.
4. Average Cost – “unit cost”
5. Marginal Cost – additional or extra cost
brought by producing one additional unit.
 6. Explicit Cost – “expenditure cost”
-payments to the owners of the factors of
production like wage, interests, bills and
etc.

7. Implicit Cost – “non-expenditure cost”

– the factors of production belong to the
users

8. Opportunity Cost – foregone

opportunity or alternative benefit
 ECONOMIES OF SCALE
 External economies of scale
- Factors which are outside the firm or enterprise,
but they contribute to the efficiency of the firm in
terms of increased output and decreased unit
cost of production.
- Government policies, electrification, transportation
and communication facilities.

 Internal economies of scale

- Factors which are inside the firm or enterprise, but
they contribute to the efficiency of the firm in terms of
increased output and decreased unit cost of production.
- Division of labor, human resource development, proper
use of machines and equipment.
APPROPRIATE TECHNIQUES OF
PRODUCTION

Labor-Intensive Technology
– more labor inputs less capital
inputs

Capital-Intensive Technoloy
-”mechanized economy”
 REVENUE
“Income side of the Firm”
Total revenue = price time units sold (TR= P x Q)
Total revenue – total cost = Profit / Loss
 Short Run

TR > VC : operate
TR < VC : shut down

Example:
FC = 10,000 VC = 5,000 Revenue = 7,000
TC = 15,000
 Long Run
TR > TC : Produce More (pure profit)
TR < TC : Stop Production (loss)
TR = TC : Maintain Production (normal profit)

Normal profit – amount which is sufficient to

encourage an entrepreneur to remain in
business

Pure profit – an amount which is in excess of

the cost of production