THE CONCEPT OF

PRODUCTION
• The creation of any good or service for the
purpose of selling to buyers is called
PRODUCTION.
• What is covered by “production” is the
creation of outputs by business firms, by
government agencies, and by non- profit
institutions like schools and hospitals.
FACTORS OF PRODUCTION
• CAPITAL
Is a finished product which is used to produce
goods.
• LABOR
Is an exertion of physical and mental efforts of
individuals.
• LAND
Where the space allotted for processing is
located.

• ENTREPRENEURIAL OR
MANAGERIAL TALENT
Which performs functions like supervision,
planning, control, coordination, and leadership.
PRODUCTION FUNCTION
• The relationship between the amount of inputs
required and the amount of output that can be
obtained .
• The output of a production process will depend
on the quality and quantity of inputs used.
PRODUCTION FUNCTION
ANALYSIS OF PRODUCTION
PROCESS
• In the analysis of the process of production, the
following must be considered:

1. The classes of inputs, and

2. The time frame references.
CLASSES OF INPUTS
• FIXED INPUT
Is one whose quantity cannot be readily changed
when market conditions indicate that a change in
output is desirable.

• VARIABLE INPUT
 Is one whose quantity can be readily changed when
a change in output is desired.
TIME FRAME REFERENCES
• 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.
SHORT RUN SITUATIONS:

IN TIMES OF RISING SALES

IF DEMAND SLOWS DOWN
• LONG- RUN
 Is that period of time in which all inputs are
variable.
This is because when fixed inputs need
adjustment, it can be done when given sufficient
time.
In the analysis of the production process,
three important terms need to be cleared:

1. Total Output (or Total Product)

2. Average Product
3. Marginal Product
TOTAL OUTPUT
• Refers to the total amount of output
produced in physical units.

• Total product can be raised only by

increasing the quantity of variable factors
employed in production.
AVERAGE PRODUCT
• Refers to the total output divided by the quantity
of the variable inputs under consideration.

AP= Q/L
Where:
 Q= Total Product
 L= Number of Workers
MARGINAL PRODUCT
• Is the additional output attributed to the increase
in the quantity of the variable inputs under
consideration.

MP= WQ/WL
Where:
 W means “change in”
TOTAL, AVERAGE, AND MARGINAL
PRODUCT OF A SOAP MANUFACTURER
NUMBER OF TOTAL OUTPUT PER AVERAGE MARGINAL
WORKERS DAY PRODUCT PRODUCT
1 50 BARS 50 BARS -
2 125 62.5 75
3 220 73.3 95
4 320 80 100
5 410 82 90
6 490 81.6 80
7 560 80 70
8 610 76.2 50
9 640 71 30
10 630 63 -10
 Total, Average and Marginal Product of Soap Manufacturer
700

600

500

400

300

200

100

0
1 2 3 4 5 6 7 8 9 10

-100
Total Output per Day Average Product Marginal Product
 Total Output Curve of a Soap Manufacturer
700

600

500

400

300

200

100

0
1 2 3 4 5 6 7 8 9 10
Total Output per Day
 LAW OF DIMINISHING
MARGINAL RETURNS
• In relation to the decrease in the rate of marginal
product, the law of diminishing returns may be stated
as:
“ As more of the same input is employed in the
production of a particular good, the corresponding
increase in total output tends to become smaller and
smaller, if the amount of the other inputs required in
the production process are kept constant.”
COST OF PRODUCTION
• SHORT-RUN COSTS
 Producing the output requires a combination of
fixed and variable cost.

• LONG-RUN COSTS
 Fixed inputs that cannot be changed in the short
run can be increased (or decreased) in the long-run.
 TOTAL COST
- refers to the sum of all the expenditures in
producing goods and services.
- Total cost may be derived by adding fixed costs to
variable costs.
 FIXED COST
- is that portion of the total cost which remains
unchanged even if the level of output changes.
 VARIABLE COST
- is that part of total cost that do vary with the amount
of output produced.
 AVERAGE COST
-is the sum of average fixed cost and the average
variable cost.
 The average fixed cost is derived by dividing the total
fixed cost with the output.
 The average variable cost may also be derived by
dividing the total variable cost with the output.
 MARGINAL COST
-is the cost of producing one more unit of output.
- It is derived by ascertaining the change in total cost
and dividing it by the change in the quantity of output.
 When there are two variable inputs, a useful
analytical tool is the PRODUCTION ISOQUANT.

An ISOQUANT is “a curve or locus points

showing all possible combinations of inputs
physically capable of producing a given level of
output.”
MARKET STRUCTURES
• Market structure may be classified into the
following:

1. The pure or perfect types

a.) pure or perfect competitions
b.) pure or perfect monopoly
2. The imperfect type
a.) monopolistic competitions
b.) oligopoly
PURE/ PERFECT COMPETITION
• Is one of four market structures in which
thousands of firms each produce a tiny
fraction of market supply in their respective
industries.
 CHARACTERISTICS OF PURE COMPETITION

1. The products of firms in the industry under consideration

are standardized.
2. The buyer and the seller are without power to change
the going market price of the product.
3. In a purely competitive market, no artificial obstacles bar
the entry and exits of firms.
4. Buyers, sellers, and resource owners have perfect
knowledge of market conditions. Business firms have
knowledge of their revenues and cost functions.
 PURE/PERFECT MONOPOLY
• Pure Monopoly is that market structure
characterized by only one producer of a product.
• The two perfect types of market structure are really
actually opposite. In terms of price determination
alone, the price of the commodity is set by the
competing firms and the buyers in the perfect
competition market. In pure monopoly, the price is
set by the sole seller or the monopolist.
MONOPOLISTIC COMPETITION
• Monopolistic competition is that type of
market structure “where there are a large
number of sellers that produce similar
products, but the products are perceived
by buyers as different.”
OLIGOPOLY
• Oligopoly is that market structure in which there
are a limited number of firms competing for a
given industry.
• The products of oligopolists are homogenous or
identical.
• Firms that would want to compete in the
oligopolistic market are barred by high initial
investment.
 SUMMARY CHARACTERISTICS OF
MARKET STRUCTURE
MARKET NUMBER OF NATURE OF EASE OF ENTRY CONTROL OVER DEGREE OF NON
MODEL SELLERS PRODUCT PRICE PRICE COMPETITION

PURE VERY LARGE HOMOGENOUS VERY EASY NO CONTROL NONE

COMPETI-TION NUMBER

MONOPOLY ONE UNIQUE VERY DIFFICULT GREAT OPTIONAL

CONTROL

MONOPO- MANY DIFFERENTIATED EASY LIMITED INTENSE

LISTIC INDEPENDENT CONTROL
COMPETI-TION SELLERS

OLIGOPOLY FEW HOMOGENOUS DIFFICULT MODERATE STRONG

CONTROL
QUESTIONS:
 1. Oligopoly is said to be the
market structure characterized
by only one producer of a
product
2. Isoquant is “a curve or locus
points showing all possible
partition of inputs physically
capable of producing a given
level of output.
 3. Producing the output
requires a combination of
elastic and variable cost.
4. The formula for the Marginal
Product is the change in
Average Product over the
change of Total Output interval.
 5. A set of factor of production
whereas responsible for organizing,
deciding and managing the
production of goods and services
also known as labor
 6. Average Product is the
relationship between the amount
of inputs required and the amount
of output that can be obtained
7. Very Long Run also means any
time period not long enough to
allow the full effects of some
changes to have operated
 8. The products of
oligopolists are
heterogenous or mixed
9. Fixed Cost is a part of total
cost that do vary with the
amount of output produced.
10. The Law of Marginal Diminishing
Return states that the more of the
same input is employed in the
production of a particular good, the
corresponding increase in marginal
product tends to become smaller and
smaller
ANSWERS
 1. Oligopoly is said to be the
market structure characterized
by only one producer of a
product

False - Pure/Perfect Monopoly

 2. Isoquant is “a curve or locus
points showing all possible partition
of inputs physically capable of
producing a given level of output.

False - combination
 3. Producing the output
requires a combination of
elastic and variable cost.

False - fixed
4. The formula for the Marginal Product is
the change in Average Product over the
change of Total Output interval.

False
delta Total Output over delta Variable Input
 5. A set of factor of production
whereas responsible for organizing,
deciding and managing the
production of goods and services
also known as labor

False - entrepreneur
 6. Average Product the
relationship between the amount
of inputs required and the amount
of output that can be obtained

False - Production Function

 7. Very Long Run also means any
time period not long enough to allow
the full effects of some changes to
have operated

False - Short Run

8. The products of oligopolists
are heterogenous or mixed

False - homogenous : fixed

 9. Fixed Cost is a part of total
cost that do vary with the amount
of output produced.

False - Variable Cost

10. The Law of Marginal Diminishing Return
states that the more of the same input is
employed in the production of a particular
good, the corresponding increase in
marginal product tends to become smaller
and smaller

False - decrease