business and the cost of production (1)

7/26/2019 Business and the Cost of Production (1)

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Business and The Cost of

Production

Prepared by:

Prof. Jonah Pardillo


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Factors of Production

1. Land a broad measure representing all thebasic natural resources that contribute toproduction.

2. Labor represents the human factor of

production.3. Capital includes previously produced durable

goods that aid in producing still other goods.(Eample: !"ce buildings# schools and

factories$4. Entrepreneurship % includes the managerial

ability# innovation# and ris&%ta&ing thatcontribute to a productive economy.


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Factors of Production


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Representation of Factors of Production


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Production

It is the transformation of inputs into outputs.

Input of Production

The factors of production such as land, capital,

and labor.


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CLASSIFICATION OF FACTORS OFPRODUCTION

1. Fixed factor it remains constant (stable)

regardless of the volume of production.

2. aria!"e factor it changes in accordance with

the volume of production. It varies with the rate

(quantity) of output.


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OUTPUT OF PRODUCTION

'oods and services that have been createdby the inputs.

Note#

Production aects the )uantity of goods and

services produced# thus it in*uences theprice of a good or service.

The )uantity of goods or services available inthe mar&et is aected by cost of production.

The cost is also aected by the relationshipbet+een resource inputs (factors ofproduction$ and product output ()uantity ornumber of units to be produced$.


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$%at are t%e factors t%at affect t%e costof production&

,. -vailability of aterials or /esources

0. 1abor

2. Technology used in the output products


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Economic Costs

Payment that must be made toobtain and retain the services

To compute Economic Costs:

Eplicit Costs 3 4mplicit Costs


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Eplicit Costs

% monetary payments on the sourcesit ma&es to those from +hom it mustpurchase resources that it does not

o+n.

/evealed and epressed

/ent# +ages# interest etc.


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4mplicit Costs

!pportunity costs of using thesources that the 5rm already o+ns toma&e the product

Present but not obvious


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-ccounting Pro5t

The pro5t number that accountantscalculate by subtracting to eplicitcosts from total sales revenue

Total 6ales /evenue 3 Total EplicitCosts


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Total sales revenue7777777777

8,09#999 Cost of T%shirts77777.89#999

Cler&;s 6alary777777..8,#999Total (eplicit$costs7777777777.8?2#999

-ccountingPro5t777777777........8>@#999


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Aormal Pro5t

Typical amount of accounting pro5tthat you +ould most li&ely haveearned in one of the other ventures.

orgone entrepreneurial income


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Economic Pro5t

/esults of subtracting all economiccosts(eplicit and implicit costs$

(/evenue% Eplicit Costs$ 4mplicitCosts


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-ccounting

pro5t7777777777777.8>@#999

orgone interest77778,999

orgone rent777777.8>999

orgone +ages7777780999

orgone entrepreneurial income..8>99

Total implicit costs7777777777.77822#999

Economic


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6hort /un: ied Plant

% - period too brief for a 5rm to alterits plant capacity# yet long enough topermit a change in the degree to +hich

the plant;s capacity is used.


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!verage "evenue

"evenue per unit

!" # T"$% # &

Total "evenue

T" # & ' %

arginal "evenue *tra revenue from + more unit

" # T"$%

LO3

Average, Total, and Marginal Revenue


19/46LO3

ir!"s#e!and$%hedule&AverageRevenue'

ir!"sRevenue

#ata

# ( MR ( AR

TR

) *# TR MR

+131

131

131

131

131

131

131

131

131

131

131

1

2

3

4

-

/

0

1

+

131

22

33

-24

--

/0

1/

140

11/

131

+131131

131

131

131

131

131131

131

131

Average, Total, and Marginal Revenue


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Three )uestions:

6hould the 5rm produce

4f so# +hat amount

Dhat economic pro5t (loss$ +ill be

realied

LO3

)rot Mai!i5ation6 TR7TCApproa%h


21/46LO3

T%e Profit'(axi)i*in+ Output for a Pure", Co)petiti-e Fir)# Tota" Re-enue Tota" Cost Approac% /Price 0 113

(+)Total &roduct(-utput) (%)

()Total /i*ed 0ost

(T/0)

(1)Total 2ariable0osts (T20)

(3)Total 0ost

(T0)

(4)Total "evenue

(T")

(5)&rofit (6)

or 7oss ()

8 9+88 98 9+88 98 9+88

+ +88 :8 +:8 +1+ 4:

+88 +;8 ;8 5 &roduce where " (#&) # 0A there,profit is ma*imiBed (T" e*ceeds T0 bya ma*imum amount) or loss isminimiBed.

@ill production result in economicprofit>

?es, if price e*ceeds average total cost(T" will e*ceed T0). Co, if average totalcost e*ceeds price (T0 will e*ceed T").


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ir! and @ndustr86 EBuilibriu!

LO4

Fir) and (ar>et Supp", and t%e (ar>et De)and


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ir! and @ndustr86 EBuilibriu!

LO4

E%ono!i%)rot

d

ATC

A=C

s( MC

+111 +111

D

S = MCs

0 0


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ied Costs6 #igging Out o a ole

6hutting do+n in the short rundoes not mean shutting do+nforever

1o+ prices can be temporary 6ome 5rms s+itch production on

and o depending on the mar&etprice

Eamples: oil producers# resorts#

and 5rms that shut do+n during


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T%e "a; of Di)inis%in+ Returns

It states that when more units of a variable input

are applied to a given quantity of fi*ed inputs,

the total output may initially increase at an

increasing constant rate but it will eventually

increase at diminishing rates.


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(@ANIN OF ISO


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Assu)ption of IsoBuants

There are only two factors of production.

The two factors can substitute each other up to

certain limit.

The shape of the isoquants depends upon the

e*tent of substitutability of the two inputs.

The technology is given over a period.


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@xa)p"e

Co!bination

Labor&nits'

Capital&nits'

Output&Buantit

8'

- , ,9 >9

B 0 @ >9

C 2 >9

I 2 >9E > , >9


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Features of IsoBuants


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(ar+ina" Rate of Tec%nica" Su!stitution /(RTS3

"T= refers to the rate at which one input factor is

substituted with the other to attain a given level ofoutput.

It is measured as

"T= # 0hanges in one input$changes in another

input

Co!binations

Labor&nits'

Capital&nits'

Output&*uantit8

'

MRT$

- , ,9 >9

B 0 @ >9 ,2

C 2 >9 ,2

I 2 >9 ,,


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Definition of Isocosts

Isocosts refers to that costcurve that represents

the combination of inputs that will cost the

producer the same amount of money.

In other words, each isocost denotes a particularlevel of total cost for a given level of production.

If the given level of production changes, the total

cost changes and thus the isocost curve moves

upwards. !nd vice versa.


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Isocost Line


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business and the cost of production (1)

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