Scribd
Upload
4 views

Elasticity of Demand.pptx

The document outlines the production process, detailing the factors of production including land, labor, capital, and organization. It explains the concepts of explicit and implicit costs, fixed and variable resources, and the importance of marginal analysis in decision-making for maximizing profits. Additionally, it distinguishes between accounting profit, economic profit, and normal profit, emphasizing the relationship between marginal revenue and marginal cost in production decisions.

Uploaded by

Mark Teves
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
4 views

Elasticity of Demand.pptx

The document outlines the production process, detailing the factors of production including land, labor, capital, and organization. It explains the concepts of explicit and implicit costs, fixed and variable resources, and the importance of marginal analysis in decision-making for maximizing profits. Additionally, it distinguishes between accounting profit, economic profit, and normal profit, emphasizing the relationship between marginal revenue and marginal cost in production decisions.

Uploaded by

Mark Teves
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 35

PRODUCTION

and
Production
The process of converting inputs into outputs
LAND
 refers to the “productive” resources given by nature and existing in their natural state
over the supply of which man has very little control.” .

LABOR
 the amount of work done by workers or employees that contributes to the production
process.

CAPITAL
 resources are the goods that are used in the production of other goods and services
like machines, equipment and buildings

ORGANIZATION
 is a special kind of labor, it includes the art of organizing business, taking
responsibility of decisions and the risks arising there from. The man who organizes
business is called the organizer or the entrepreneur.
Level of inputs used in the production process shows that the level of output Y
depends on the level of inputs consumed. This means that any variation in input
usage can cause to either increase or decrease the production.
● EXPLICIT COST
○ also known as accounting costs, are normal business
expenses that appear in the general ledger. These
costs can directly affect the business’s
profitability. These are costs that involve spending
money. (Salaries and wages/Rent expenses)

● IMPLICIT COST
○ implicit cost represents non monetary opportunity
cost. Unlike explicit costs, implicit costs are the
costs associated if you would do something, like
investment. (Depreciation/lost interest income)
TWO TYPES OF RESOURCES

● FIXED ● VARIABLE
○ are inputs that do not ○ Variable resources are
change with the level of resources you change to
output. (Example: rent, alter the level of output.
mortgage payments, or car (Example: The more unit to
payments produce, the more units of
materials to purchase and
more employees to work)
COST OF PRODUCTION
● Fixed
○ Costs that don’t change with the amount produced like salary.
● Variable
○ Costs do change with the amount produced like raw materials, labor
and other resources
● Total Cost
○ Fixed costs plus variable costs
● Marginal Cost
○ Additional cost of producing one more output. (Change in total cost
/Change in output)
CONCEPTUAL TIME PERIOD
with respect to production decisions

● SHORT RUN ● LONG RUN


 A time frame of the production  A situation where every factor is
in which at least one factor of variable and can be changed
input is fixed and cannot be  Focused on how those inputs can
changed such as land or be changed and rearranged to
capital increase profits in the future.
 More heavily focused on how
to manufacture the output to Note:
satisfy the orders on the books
for a specific period of time.  All PRODUCTION takes place in the short run.
 All PLANNING takes place in the long run
Maximize Profits & Utility
MARGINAL ANALYSIS
● Economics in many ways is all about choices, to get one we like that we’ll have to give up
for something we like. There are 3 important concepts that underpin the rational decision
making in economics:

 Opportunity Cost – the best alternative given up to make a choice (next best choice)
 Marginal Benefit - extra benefit that a producer gets from producing one more unit
of a good.
 Marginal Cost - the change in cost for making one additional good or incremental
unit of service.

Rational Individuals make decisions by comparing marginal benefit and marginal cost

MARGINAL CHANGES – small incremental adjustments to an existing plan of action


MARGINAL BENEFIT VS MARGINAL COST

● Marginal Benefit (Marginal Utility) ● Marginal Cost- additional cost of


○ Is the extra pleasure or satisfaction producing one more unit of good or
you get from consuming one more service
unit of good or service
Law of Increasing Marginal Cost – As
Law of Diminishing Marginal Utility – you produce more of the product, you
The more you have of something , the must use resources that are of lower
less satisfaction an additional unit quality or are more expensive.
provides.

According to this law , total utility is


maximum when marginal utility is
equal to 0. After 0, total utility starts to
drop.
● Adding more resources could result to
lesser output. This refer to the idea of
diminishing marginal returns.

○ As we add variable resources to


fixed resources, the additional
output will eventually decrease

From the example table, with which


worker does the law of diminishing
marginal returns begin?
MANAGERIAL DECISION MAKING
in PRODUCTION

Type 1 Type 3

Type 2 What type of


What input
technology to
combination
How much use?
to chose?
output to
produce?
● Marginal means CHANGE in the total
Downward sloping
marginal benefit
curve to the right
because as you do
more of something,
the marginal
benefit decreasing

Decision do no just look into the marginal benefit but also in the marginal cost.
Basically, rational decision makers will choose 4 hours of studies to get a perfect
score. Marginal benefit VS Marginal cost is where the decision of how many hours to
study is to be made
Marginal cost slopes upward because each additional cost of studying is more
costly than the previous
BENEFIT MAXIMIZATION
When Marginal Benefit equals the Marginal
Cost

 ACT if the MB> MC


 Do not ACT if MB<MC

Based from the data, the marginal cost is


never equal to the marginal benefit

Question: How many hours should the


student need to study?
Student should keep on studying as long as
the Marginal Benefit is greater than the
Marginal Cost .
● How much is the 5th unit cost by merely looking at the graph?
You will only produce when the MR=MC
We must know the level of output to
produce to maximize the profit.
● ACCOUNTING PROFIT – Total Revenue less Explicit Costs
● ECONOMIC PROFIT – Total Revenue less Explicit & Implicit costs
● NORMAL PROFIT – when economic profit is Zero / Accounting profit is equal to the
implicit costs(breakeven)

Example:
 When I quit teaching to open up a business where I earn P50,000 as a teacher,
explicit fixed cost of 10,000, explicit variable cost of 12,000 while my total revenue in
business is P30,000.
 My Accounting Profit is P8,000(P30,000- 22,000)
 My Economic Profit is –P42,000(P8,000-P50,,000)
Figure out when MR hits MC

● What is the profit maximizing


quantity? - 5
● What is the total revenue at the
quantity? - $150 (MR$30 X 5
Output)
● How much is the profit? $70 ($150-
$80)

Therefore, the company is not just


making profit but maximizing profit at
the 5th unit
 When TR is greater
than the TC by the
larger amount.

 Application of
Marginal Analysis

 MR = MC
● The company should
produce as long as the
Marginal Revenue is equal
or greater than the
Marginal Cost but never
when the Marginal
Revenue is less than the
Marginal Cost.
The price at which a seller can make the most profit
“A business that makes nothing
but money is a poor business.”
-Henry Ford

You might also like