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Those goods produced by man are called economic goods on the other hand, goods which are produced without costs are called free goods.
Production Function
Production Function
States the relationship between inputs and outputs Inputs the factors of production classified as: Land all natural resources of the earth
Production Function
Process
Product or service generated value added
Output
1. Land - original gift of nature. it includes the soil, rivers, lakes, ocean, mountain, forests, mineral resources, and climate. 2. Labor - exertion of physical and mental efforts of individuals. it applies to workers, laborers, professionals like accountant, economists, and scientists.
Production is the creation of goods and services to satisfy human wants. Inputs of production are the factors of production and the goods and services that have been created by the inputs are called outputs of production.
3. Capital - a finished product which is used to produce other goods. 4. Entrepreneur - organizer and coordinator of the land, labor, and capital .
Variable Factor(Variable Input) - this means that no production means no variable factor. more production means more variable factor. - it changes in accordance with the volume of production
Theory of Production
- the process of transforming both fixed and variable inputs into finished goods and services. Production Function- technical relationship between the application of inputs (factor of production) and the resulting maximum obtainable output.
Marginal Product
-Defined as the additional product brought about by one additional unit of a variable input. -When a marginal product increases, total product also increases -When marginal product decreases, total product increases at a decreasing rate when marginal product is below zero or negative, total product falls.
Economic Costs
1. Total Cost - sum total cost of production. these are also known as factor payment: wage for labor, rent for land, interest for capital, and normal profit for the entrepreneur. Normal Profit - amount which is sufficient to encourage an entrepreneur to remain in the business pure profit - amount which is in excess of the cost of production
2. Fixed Cost - kind of cost which remains constant regardless of the volume of production. - no production. there is still cost 3. Variable Cost - kind of cost which changes in proportion to volume of production. - no production, no cost .. more production, more cost 4. Average Cost - also called unit cost AC= TC/Q
5. Marginal Cost - additional or extra cost brought about by producing one additional unit. MC= TC/Q 6. Explicit Cost - also called expenditure cost - payments to the owners of the factors of production like wages, interest, electric bills, and so on.
7. Implivit Cost - also called non- expenditure cost - factors of production belong to the users so the do not pay. 8. Opportunity Cost - foregone opportunity or alternative benefit.
Short Run refers to a period of time which is too short to allow an enterprise to change its plant capacity, yet long enough to allow a change in its variable resources. Long run refers to a period of time which is long enough to permit a firm or enterprise to alter all its resources or inputs.
External Economies of Scale - factors which are outside the firm or enterprise but contribute to the efficiency of the latter in terms of increased output and decreased unit cost of production. Examples: government policies, electrification, and transportation and communication facilities
Internal Economies of Scale - factors inside the firm or enterprise which contributed to the efficiency of the latter. Examples: division of labor, human resources development, managerial specialization, modern techniques of production effective utilization of by-product.
Labor Intensive Technology - more labor inputs and less capital inputs Capital Intensive Technology - more capital inputs and less labor inputs
Revenue- Income side of a firm Total Revenue = Price system units sold TR= PxQ Total Revenue - total cost = profit The Rule is: If total revenue is greater that variable cost, operate If total revenue is less than variable cost, shut down TR > TC : produce more TR < TC : stop production TR = TC : maintain production
Marginal Cost - the production of one additional unit means additional cost of production. The rule is: If the marginal revenue is greater that marginal cost , increase production If marginal revenue is less that marginal cost, do not increase production MR= MC - profit maximization
In the case of purely competitive firm , price and marginal revenue it stated therefore: Profit maximization is attained at a point where price equals marginal cost P= MC
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