Production and factors of production

Production and Factors of ProductionProduction and Factors of Production

Production is the creation of goods and servicesProduction is the creation of goods and services . .

Factors of Production are referred to as resources used in Factors of Production are referred to as resources used in the creation of goods and services, namelythe creation of goods and services, namely;;

11 . .LandLand

22 . .LaborLabor

33 . .CapitalCapital

44 . .Entrepreneurial AbilityEntrepreneurial Ability

Relationship of Components of the ResourcesRelationship of Components of the Resources

Production With One Variable Production With One Variable InputInput

•Labor is necessary for no one can produce goods and services alone – without exertion of efforts.

•Production Function –the relationship between inputs and output.

•Two types of input•1 .fixed input

•2 .variable input

Table4.1Labor Input and Output CabbageTable4.1Labor Input and Output Cabbage

Days KilosMarginal Product

1

2

3

4

10

22

36

51

0

12

14

15

Marginal ProductMarginal Product•The word marginal means additional.

•An additional product is created when there is an •additional input.

•The marginal product can be computed

•with this formula:

•MP=Change in output

• Change in Input

Law of Diminishing Returns/Law of Marginal Law of Diminishing Returns/Law of Marginal Productivity/Law of Variable ProportionProductivity/Law of Variable Proportion

•The law states that when successive units of variable input are combined with a fixed input, additional product brought about by the additional unit of a variable input

declines.

Stages of ProductionStages of Production

•1 .Stage Of Increasing Returns

•2 .Stage of Decreasing Returns

•3 .Stage of Negative Returns

Brief ReviewBrief Review.11.What is Production?

2.What are the four factors of Production?

3.Why is labor necessary?

4.What are the two types of input?

5.The word marginal means-----

6.What the three stages of production.?

Fill in the BlanksFill in the Blanks•The Law of Diminishing Returns states

that when successive units of_____ input are combined with a ____ input, additional product brought about by the additional

_____ of a variable input.______

Primordial Objectives Of BusinessmenPrimordial Objectives Of Businessmen

•1.earn and maximize more profits.

•2.minimize losses

Short Run and Long RunShort Run and Long Run

Short run means the period of time which is not possible to change all inputs, only some inputs such as labor can be changed.

•Long run is the minimum period of the time during which all inputs to production can be changed.

Economies of ScaleEconomies of Scale

Classifications of Economies of Scale

1.External economies of scale

2.Internal economies of scale

•Relationship of Total Cost and Total Revenue

•Under a short run period, a firm has both fixed and

•variable cost.

•Q. Under what conditions would businessman operate or shut down?

Answer. If total revenue is greater than variable cost operate; if total revenue is less than variable cost, shut down; if total revenue is equal to total cost, maintain

production .

ExampleExample

FC:P10,000.00

VC:P5,000.00

TC:P15,000.00

Supposing Total Revenue is P7,000.00 which is greater than the variable cost but less than the total cost.

Q1. If the firm operates, how much

is its loss?

Q2. If the operate shut down, how much is its loss?

AnswersAnswers

•If the firm operates, its loss is P3,000.00(FC-TR=Loss/Profit).

•If the firm closes down, its loss is P10,000(FC).

Break-Even AnalysisBreak-Even Analysis

•Break-even analysis is a tool used by economists in solving managerial problems, projecting revenues, costs and profits.

•Break-even analysis may also be used to determine the 1.effect of projected decline in sales on profit, the 2.number of units an

enterprise must sell in order to break-even .

FormulaFormula

•Break-even point •sales volume (BSPSV) = FC

USP-UVC

•Where: FC=Fixed Cost• USP=Unit selling price

• UVC=Unit variable cost

ExampleExample•How many units must be sold in order to break even?

•F=P100,000,USP=P10.00, UVC=P5

•UVC=P100.00 =20,000 units • P10-P5

•Break-even point selling price (BEPSP)=FC+VC

• QC

Where: FC=Fixed cost

VC=Variable cost

Q =Quantity

ExampleExample::

•What should be the unit price to break-even?

•,FC=P100, VC=P20,000,Q=30,000

• P100,000+P20,000 = P4• 30,000

The Law of Supply and DemandThe Law of Supply and Demand

•The Law of Supply and Demand states that when supply is greater than demand price decreases. When demand is greater than supply price increases. When supply is equal to demand, price remains constant.

•Q1. In the law of supply producers are willing and able to offer more goods at

what price?

•Q2. In the law of demand buyers are willing and able to purchase at what price?

Table of Supply and Demand schedule indicating the equilibrium price Table of Supply and Demand schedule indicating the equilibrium price or market price. At a higher price, there is surplus, while at a lower or market price. At a higher price, there is surplus, while at a lower price, there is shortageprice, there is shortage..

Quantity Supplied

PriceQuantity Demanded

12345

12345

5 4 shortage 3 equilibrium 2 surplus 1

•Q3. Surplus of goods means?

•Q4. Shortage of goods

•means?

•Q4. A situation where quantity supplied and quantity demanded are equal is

known as?

Supply EquationSupply Equation

•Supply Equation is used with mathematical equation with two variables. The Q’s (quantity supplied) as dependent variable and P (price) as independent variable

Let’s say 500 is the impossible number of wallet that the producers are willing to sell and offer at a lower price of P10.00

Graph 1- Schedule of supply of WalletGraph 1- Schedule of supply of Wallet

Points Quantity Supplied

Price

ABCDEF

0100250400750

1000

101215182530

•Q.

1.At what price the producers are reluctant to produce more?

2.As the price increases, the quantity supplied also._____

3 .Whatever change in Qs can be related to the value of how much?

Supply CurveSupply Curve

•The Law of Supply shows that:

•1 .the increase in price is an incentive to the buyers to purchase the supply of goods.

•2 .more producers are willing to produce at a higher price.

•3 .price and quantity supplied has a direct relationship .

Determinants of SupplyDeterminants of Supply

•1.Technology

•2.Cost of Production

•3.Number of Sellers

•4.Prices of other goods

•5.Price Expectation

•6.Taxes and Subsidies

•In the final analysis, the supply of goods will either increase of decrease.

SUMARYSUMARY

•1.Supply is one side of the market. It represents producers or sellers.

•2.The producers are willing and able to create more goods and services and offer these in the market when prices are higher, as long as cost of production remains the same.

•3 .The law of supply shows the direct relationship of supply and quantity. That is, higher price encourages the production of more quantities of commodities while lower price reduces the number of goods and services for sale.

•4 .The determinants of supply are technology, cost of production, prices of other goods, price expectation, number of

sellers, taxes and subsidies .

Elasticity of SupplyElasticity of Supply

•Supply elasticity refers to the reaction or response of the sellers/producers to price change of goods or the price elasticity of supply is use to measure the percentage response of the producers or sellers in the percent change in price.

A graph showing a change in price results in a A graph showing a change in price results in a greater change in quantity suppliedgreater change in quantity supplied

InterpretationInterpretation

•1.At price P40 the quantity supplied increases to______(how much?) .

•

•2 .At price P60 the quantity supplied increases to how much?

ComputationComputation

•P1=40 Q1=200 400 •P2=60 Q2=600 = 400 • 20 • 600 -200 50

• 200+600• Eps= 2 =400 x 50

• 60-40 400 x 20• 40+60

• 2 = 20,000• 8,000

• 400 • 800 = 2.5 elastic

• = 2 • 20• 100

• 2

•Sugar, Rice