Chapter 5

Production
Production
 The act of combining the
factors of production by
firms and institutions in
order to produce goods Taray! Ang ganda ng
and services katawan. Pagdating sa
mukha, ay, ang ganda
ng katawan.

inputs outputs
Inputs
• Gifts of nature to
Land our productive
processes

Kung mataba ka,

iwasan magsuot ng • Mental and physical
high heels. Baka Labor abilities used in the
biglang maging production process
tsinelas.

• Goods used in the

Capital production of other
goods and services
Outputs
 Various useful goods and Goods
services that result from
the production process Final goods
and are either consumed
or employed further in
Intermediate
production
goods

Services
 Technology
 Body of knowledge
applied to how goods are
produced
Ang pag-ibig ay parang
bayad sa jeep. Minsan
hindi nasusuklian. Labor intensive
technology

Capital intensive
technology
Types of input
Fixed input – any resource
the quantity of which
cannot readily be changed
when market conditions Ang taong gusto mo,
parang ice cream:
indicate that a change in matutunaw pag tititigan
output is desirable mo lang, kaya dapat,
Variable input – any dilaan agad.
resource the quantity of
which can readily be
changed in response to a
change in output
Short run vs Long run Production
Short run – a period of
time so short that there
is at least one fixed input
Ako na ang
magbabayad ng tuition
fee mo, pag-aralan mo
lang na mahalin ako.
Long run – a period of
time so long that all
inputs are considered
variable
Product
Total product
 Refers to total output
produced after utilizing
the fixed and variable Ang pagmamahal ko
inputs in the production sayo ay nasa kabilang
classroom. Ibang klase
process talaga.
 Marginal product
 Extra output produced
by one additional unit of
Kutsara ka ba? Kasi an input while other
papalapit ka pa lang, inputs are held constant
napapanganga na ako.
Average product

Dalawang beses lang

 Total product divided by
naman kita gustong
total units of input used makasama eh: now and
forever.
Marginal, total and average product
Hypothetical Production Schedule of Pencils
Input (Labor) Total Product Marginal Product Average Product
0 0 0 -
1 8 8 8
2 20 12 10
3 37 17 12
4 57 20 14
5 72 15 14
6 80 8 13
7 85 5 12
8 88 3 11
9 86 -2 10
10 82 -4 8
Graphical Presentation
Law of Diminishing Returns
 We will get less and less
extra output when we
add additional amount Ano ang pinagkaiba
of an input while mo sa tubig? Ang tubig
iniigib, ikaw iniibig.
holding other inputs
fixed
Returns to scale
Constant • A change in all inputs leads to a
returns to scale proportional change in output

Increasing • A change in all inputs leads to a more-

returns to scale than-proportional change in output

Decreasing • A change in all inputs leads to a less-

returns to scale than-proportional change in output
Theory of Cost
Cost
 Refers to all expenses
acquired during an
economic activity or
production of goods or
services If someone’s flirting
with you, please
cooperate.
Profit = Sales – Costs

Profit = Total _ Total

Revenues Costs
Cost
• Payments to
Explicit non-owners of a
Kapag nag-sorry sayo, Costs firm for their
patawarin mo. Parang resources
palengke lang yan.
Hindi siya hihingi ng
tawad kung hindi ka
mahal. • Opportunity
Implicit costs of using
Costs resources owned
by the firm
Cost
• Overhead or supplementary cost
Fixed • Expenses that do not change
cost regardless of a change in the
quantity of output produced

• Prime or operating cost

Variable • Expenses that change as a
consequence of a change in the
cost quantity of output produced
Total Cost and Average Cost
Total Cost

TC = TFC + TVC
Dilim ka ba? Kasi
Average Cost nung dumating ka,
wala na akong
AFC = TFC / Q makitang iba.

AVC = TVC / Q

ATC = TC / Q
ATC = AFC + AVC
 Marginal Cost
Kapag wala ng sagot sa
 The cost of producing
exam, ilagay mo “Red one additional unit of
Horse” dahil ito ang output
tama. Pero kung gusto
niyo mas sigurado,
ilagay niyo “magmahal”
dahil kailanman, hindi
mali ang magmahal.
Short Run Cost Schedule
Q FC VC TC MC AFC AVC ATC
0 100 0 100 - - - -
1 100 40 140 40 100 40 140
2 100 68 168 28 50 34 84
3 100 90 190 22 33 30 63
4 100 115 215 25 25 29 54
5 100 148 248 33 20 30 50
6 100 195 295 47 17 33 49
7 100 260 360 65 14 37 51
8 100 350 450 90 13 44 56
9 100 460 560 110 11 51 62
10 100 600 700 140 10 60 70
Short Run FC, VC, TC Curves

Ang love parang

magic. Hangga’t hindi
nahuhuli ang
pandaraya, patuloy
kang maniniwala.
Short Run MC, ATC Curves

Kung may mahal ka,

ipaglaban mo. Pero
kapag dalawa ang mahal
mo, paglabanin mo.
Matira ang matibay!
Profit Maximization
 Terms
Revenue – amount that a
firm takes from the sale
Kung may pangit na of its product
magsabing “pwede bang
manligaw?”, sagutin mo
“sure, basta hindi lang sa Marginal revenue –
akin”.
additional revenue in
selling one more unit of
a product
Terms
Profit – the difference that
arises when a firm’s total
revenue is greater than
its total cost
Ang love parang
siopao. Minsan bola-
Economic profit – return bola lang.
accruing to owners after
the payment of all
explicit costs and all
implicit costs
 Profit Maximization

 The process by which a

Ang feeling ng in love
firm determines the
ay parang grades.
Minsan bagsak, minsan price and output level
naman incomplete. that returns the greatest
profit
TR – TC Model

 Profit = TR – TC

 Profit is maximized
when total revenue
exceeds total costs by the
greatest amount
MR – MC Model
 MR = MC

 Profit is maximized
when marginal cost is
equal to marginal
revenue