FIRST QUARTER

MODULE 4- WEEK 4
PRODUCTION AND COST

CONTENT STANDARD : The learner demonstrates an understanding

of economics as an applied science and its
utility in addressing the economic problems
of the country.
PERFORMANCE STANDARD : The learners shall be able to analyze and
propose solution/s to the economic problems
using the principles of applied economics.
LEARNING OUTCOMES : Conceptualize the transformation of inputs
into desirable outputs through a flowchart
COMPETENCIES/CODE : Determine the implication of market pricing
on economic decision making

ABM_AE12-Ie-h-7

TOPICS : Production and Costs

What I know
MULTIPLE CHOICE: Write the letter of your choice on a separate sheet of
answer.

1. Roundabout production usually leads to _______________.

a. The use of fewer capital goods
b. Smaller markets
c. Greater production
d. Simultaneous increases in consumer goods production

2. The basic reason for the production of capital goods is to __________.

a. Promote the concentration of economic power in the business
sector
b. Facilitate exchange where a coincidence of wants does not
exist
c. Better synchronize the operation of resource and product
markets
d. Enhance future productive efficiency

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3. Specialization in production is economically beneficial primarily
because it ______________.
a. Allows everyone to have a job which they like
b. Permits the production of a larger output with fixed amounts
of resources
c. Facilitates trade by bartering
d. Guarantees full employment

4. Barter __________________.
a. Is the major means of exchange in centrally planned
economies
b. Accounts for over 30 percent of the income of all money
exchanges in the economy
c. Entails the exchange of goods for goods
d. Is used to circumvent the problem of a lack of coincidence of
wants among potential buyers and sellers

5. A firm’s economic profit is ______________.

a. Usually lower than its normal profit
b. Profit over and above that which it needs to compensate for
the time and other resources the owner supplies to the
business
c. A cost of production
d. A signal to the firm that it is producing too much output

6. The economic function of profits and losses is to ______________.

a. Bring about a more equal distribution of income
b. Signal that resources should be reallocated
c. Eliminate small firms and reduce competition
d. Tell government which industries need to be subsidized

7. Suppose a firms total economic cost in producing 1000 aluminum

baseball bats is 10, 000 pesos. These bats are then sold by the firm for
12, 000 pesos. Thus the firm _______________.
a. Is necessarily using the least-cost production technique
because it is realizing an economic profit
b. Normal profit is 2000
c. Economic profit is 2000
d. Economic reason for the aluminum bat industry to expand or
contract

8. Suppose industry A is realizing substantial economic profit. Which of

the following best describes the adjustment process that would bring
about a new equilibrium? Firms will ________________.
a. Leave the industry, output will fall and product price will rise
b. Enter the industry, output will rise and product price will rise
c. Leave the industry, output will rise and product price will fall
d. Enter the industry, output will rise and product price will fall

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 9. The most efficient combination of resources in producing any output is
the combination that _______________.
a. Comes closest to using the same quantities of land, labor,
capital and entrepreneurial ability
b. Can be obtained for the smallest money outlay
c. Uses the smallest total quantity of all resource
d. Conserve most on the use of labor

10. Which of the following best describes the guiding function of

competitive prices?
a. Profitable industries contract and unprofitable industries
expand
b. The market system will always generate economic profits for
firms that use the least costly production technology
c. The market system can negotiate reallocations of resources
that are appropriate to changes in consumer tastes,
technology and resource supplies
d. When prices are in equilibrium, product shortages or
surpluses cannot occur

Lesson
PRODUCTION
1

What I Need To Know

This module is designed to help you understand how market prices is

determined and how the supply and demand mechanisms affects its pricing
determination. In the entire week, you will learn that market price of outputs,
available technology and input prices as the bases of decisions.
At the end of this lesson, you are expected to:
1. Define production
2. Compare the price of commodities and analyze the impact to consumers
using production and cost.
3. Illustrate graphically the cost of production.

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 What’s In
Read the problem and answer it on a separate sheet of paper.
PROBLEM: Vidia is a working student who does buy and sell on her spare
time. She buys and sells anything online. If she bought a 50ml hand sanitizer
for a 50 pesos per bottle and wanted a mark-up of 20% on cost, how much
will she sell it? if she wants a mark-up price based on the selling price of 70
pesos per bottle, how much will her mark up? Show your solution.

What’s New
The fundamental objective of the firm is to maximize profit. The firm has to
know how much it costs to produce a good or service. In the language of
economics, the firm has to know three things:
a. The market price of output
b. The techniques of production that are available
c. The prices of inputs
If you get the chance to be a producer of a certain product, how will you
maximize profit and yet would still give good service to the people?

What Is It
Production is a process of combining various material inputs and immaterial
inputs (plans, know-how) in order to make something for consumption
(output). It is the act of creating an output, a good or service which has value
and contributes to the utility of individuals.
Optimal method of production is a method that minimizes cost. Production
technology relates inputs to outputs, it is a process by which inputs are
combined and transformed into outputs. The production may ether be a labor
intensive technology or capital intensive technology. Labor intensive
technology relies on human labor instead of capital whereas the capital
intensive technology relies on capital instead of human labor.

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 The Production Process

Figure 1: Shows how inputs are turned into an output, called the consumer goods.

Inputs to Production:
Variable input – inputs like labor
Fixed input – inputs like machineries or equipment

Concepts in Production:
1. Total product – total output
2. Marginal product – the additional output that can be produced by
adding one more unit of input
Note: Marginal means extra, additional or increment
3. Average product – amount produced by each unit of a variable input of
production
AP = TP
Q

Where: AP is average product, TP is total product and Q is quantity

To illustrate graphically the relationship of the average product, total product

and marginal product. The point of intersection where MP equals AP implies
that AP is already at a maximum and thus any additional unit of input to
produce will lead to a diminish of its output.

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Figure 2: Show the total product curve rising as additional of labor are added.

The Law of Diminishing Marginal Returns is when additional units of

variable are added to a fixed input after a certain point, the marginal product
of the variable input declines.

Holds that we will get less and less extra output when we add additional doses
of an input while holding other inputs fixed. In other words, the marginal
product of each unit of input will decline as the amount of that input
increases, holding all other inputs constant. As clearly illustrated by the table
below.

Units of Labor Total Product Marginal Average Product

Product
0 0
1 2000 2000 2000
2 3000 1000 1500
3 3500 500 1167
4 3800 300 950
5 3900 100 780

The table shows the total product that can be produced for different inputs of
labor when other inputs and the state of technical knowledge are unchanged.

Efficient production requires time as well as conventional inputs like labor.

We therefore distinguish two different time periods in production and cost.

Period:
Short run – a period of time wherein only some inputs are variable like labor
can be adjusted.
Long run – a period of time wherein all factors employed by the firm can be
changed including capital, equipment, machineries

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Cost minimizing choice among alternative technologies in production

Technology Units of Units of Cost = L x PL Cost = K x Pk

Capital Labor PL = 1, Pk = 1 PL = 5, Pk = 1
A 2 10 12 52
B 3 6 9 33
C 4 4 8 24
D 6 3 9 21
E 10 2 12 20

Where PL is the price of labor, PK is the price of capital. In order to

compute for the cost, the formula to compute for the least cost in production
as best alternative:

LCP = PL x L + PK x K

Alternative C and alternative E as the best choice in production given the

corresponding prices of inputs like capital and labor

What’s More
TRUE OR FALSE: Write TRUE if the statement is true and FALSE if the
statement is false. Write your answer on a separate sheet of paper.
1. The real opportunity cost of producing product X is the amounts of
products Y, Z, and so forth, that might have been produced if resources
had not been used to produce X.
2. The short run is a period of time during which all costs are fixed costs.
3. Variable costs are costs that vary directly with output.
4. The law of diminishing returns explains why the long-run average total
cost curve is U-shaped.
5. Diseconomies of scale stem primarily from the difficulties in managing
and coordinating a large-scale business enterprise.
6. At zero units of output a firm's variable costs are zero.
7. Average fixed costs diminish continuously as output increases.
8. If the marginal-cost curve lies below the average-variable-cost curve,
the average-variable-cost curve must be falling.
9. Economic profit is found by subtracting accounting costs from total
revenue.
10. A firm's economic profit is usually higher than its accounting profit.
11. In economics, a firm earns a normal profit when its total revenue
equals its total economic costs.
12. The law of diminishing returns explains why short-run marginal cost
curves are upward sloping.
13. The law of diminishing returns explains diseconomies of scale.
14. Minimum efficient scale varies by industry.

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 15. An expenditure on a nonrefundable, nontransferable airline ticket is
an example of a sunk cost.

Lesson
Cost
2

What I Need To Know

In this lesson, you are expected to:

a. Define cost
b. Compare the price of commodities and analyze the impact to consumers
using cost.
c. Illustrate graphically the cost of production.

What’s In
All firms have costs that they must bear regardless of the output. To learn
more about cost, consider the hypothetical situation. Write your answer on a
separate sheet paper.

SITUATION: It is your passion to cook and you have been thinking of favorite
food you love to eat. You have decided not only to cook for yourself but to
share it to anyone. In your decision making, consider the following guide
questions:

a. Do I have enough money to buy the ingredients?

b. For whom will it be?
c. Will the expenses be worth it?

Note: If your answer to letter a is YES, continue to letter b. If your answer is NO,
proceed to number 2.

1. Provided that you have decided to share your passion. List down your
possible expenses showing your ingredients and the amount it will cost
you.

2. How important is cost? What is your definition of cost?

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 What’s New
The same way for firms, a decision has to make based on the its cost.

Kinds of costs:

a. Fixed costs – any cost that does not depend on the firm level of output.
These are costs incurred even if the firm is producing nothing.
b. Variable costs – a cost that depend on the level of production chosen
c. Total cost – total fixed cost plus total variable cost
d. Marginal cost – the increase in total cost that results from producing
one more unit of output.
Note: Marginal means extra, additional or increment

Firms have a number of production techniques available and the option to

choose is the option that produces the least cost as possible. See the table
below for example:

Labor Intensive Technique Production:

Produce Using Units of Input Required Assuming PK
Technique K L = 2, PL = 1
TC = K x PK + L
x PL
1 unit of A 4 4 12
output B 2 6 10
2 units of A 7 6 20
output B 4 10 18
3 units of A 9 6 24
output B 6 14 26

Where: K is capital, L is labor, PK is the price of capital, PL is the price of labor

and TC is total cost

The table shows that the firm can choose all the possible options to produce
the output. However, in this case, the firm will choose the least cost in
production which is to produce 1 unit of output, option B. In producing option
B, it only requires 2 units of capital and 6 units of labor in the production.
Option B is a labor intensive technique.

What Is It
Cost Concepts:

1. Total fixed costs – costs that do not depend on the quantity of output
produced.

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 2. Total variable costs – costs that vary with the level of output

3. Total cost – is equal to total fixed cost plus total variable cost

TC=TFC+TVC

4. Average fixed costs – fixed costs per unit of output

AFC = TFC
Q

5. Average variable costs – variable costs per unit of output

AVC = TVC
Q

6. Average total costs – total cost per unit of output

ATC = TC or ATC = AFC + AVC

Q

7. Marginal costs – the increase in total cost that results from producing
one additional unit of output

MC = TC
Q

Note: marginal means extra, additional or increment

The summary of the cost concepts provides the definition and the equation.

The relationship of the costs of production:

Figure 3

Total cost is made up of fixed and variable cost. The marginal cost falls and
then rises, as indicated in the figure.

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 What’s More?
Complete the cost table. You may use a separate sheet of paper. Refer to the
summary of cost concepts for the formula.

Q TC TFC TVC AVC ATC MC

0 100 100
1 130 100
2 150 100
3 160 100
4 172 100
5 185 100
6 210 100
7 240 100
8 280 100
9 330 100
10 390 100

What I Have Learned?

In this time of pandemic, what business venture will suit you? how important
it is to be meticulous about your pricing, production and cost in your
supposedly business venture? Explain in 3 sentences.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________

What I Can Do
Answer the following questions. Please use a separate sheet of paper.

A. What is production? Give at least 3 products and use a flowchart to

illustrate the production process.

B. Suppose that the production of face mask can be produced using two
different production techniques A and B. The following table provides
the total input requirements for each of five different total output levels.
Compute for the least cost of production and determine the best
alternative in producing face mask. Use separate sheet for your answer.

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 Where Q is quantity, K is capital and L is labor

Q =1 Q =2 Q =3 Q =4 Q =5
Technology K L K L K L K L K L
A 1 5 2 10 5 14 6 18 8 20
B 5 2 8 3 11 4 14 5 16 6

1. Assuming that the price of labor is 1 peso and the price of capital is 2
pesos. Calculate the total cost of production for each of the five levels
of output using the optimal technology at each level.
2. Under the assumption that the price of labor rises from 1 peso to 3
pesos while the price of capital remains at 2 pesos. Compute for the
production cost.

Assessment
Multiple Choice Questions: Write the letter of your choice on a separate sheet
of paper.

1. Which of the following is most likely to be a fixed cost?

a. Shipping charges
b. Property insurance premiums
c. Wages of unskilled labor
d. Expenditures for raw materials

2. If you owned a small farm, which of the following would be a fixed cost?
a. Harvest labor
b. Hail insurance
c. Fertilizer
d. Seed

3. Which of the following is most likely to be a variable cost?

a. Fuel and power payments
b. Interest on business loans
c. Rental payments on Microsoft equipment
d. Real estate taxes

4. If you operated a small bakery, which of the following would be a

variable cost?
a. Annual lease payment for the use of building
b. Baking supplies
c. Baking oven
d. Interest on business loans

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5. Which of the following is correct?
a. When total product is rising, both average product and marginal
product must also be rising
b. When marginal product is falling, total product must be falling
c. When marginal product is falling, average product must also be
falling
d. Marginal product rises faster than the average product and also falls
faster than the average product

6. The law of diminishing marginal returns describes the___________

a. Relationship between total and total revenues
b. Profit maximizing position of a firm
c. Relationship between resource inputs and product outputs in the
short run
d. Relationship between resource inputs and product outputs in the
long run

For numbers 7-11: Please refer to the Cost table below.

Cost table
Quantity 0 1 2 3 4 5 6
Total 24 33 41 48 54 61 69
cost

7. The total variable cost of producing 5 units is?

a. 61 b. 48 c. 37 d. 24

8. The average total cost of producing 3 units of output is?

a. 14 b. 12 c. 13.50 d. 16

9. The average fixed cost of producing 3 units of output is?

a. 8 b. 7.40 c. 5.50 d. 6

10. The marginal cost of producing the sixth unit of output is?
a. 24 b. 12 c. 16 d. 8

11. The profit maximizing of this firm is?

a. 3 b. 4 c. 5
e. Cannot be determined from the information given

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For numbers 12-14: Please refer to the production table below

Production table
Units of labor
Inputs 0 1 2 3 4 5 6 7
of
Labor
Total 0 8 18 25 30 33 34 32
Product

12. When total product is increasing at an increasing rate, marginal product

is?
a. Positive and increasing c. Constant
b. Positive and decreasing d. Negative

13. When total product is increasing at a decreasing rate, marginal product

is?
a. Positive and increasing c. Constant
b. Positive and decreasing d. Negative

14. When total product is diminishing, marginal product is?

a. Positive and increasing c. Constant
b. Positive and decreasing d. Negative

15. Which of the following is not correct?

a. Where marginal product is greater than average product, average
product is rising
b. Where total product is at maximum, average product is also at a
maximum
c. When marginal product is falling, average product must also be
falling
d. Marginal product rises faster than average product and also falls
faster than average product

Answer Key
76, 50 36,38
66, 43 30, 29
52, 34 24, 26
34, 35 14, 19

2. 17, 16 1. 7,12
WHAT’S MORE

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References:
BOOKS:
Arnold, Roger A. Principles of Economics. 11th edition. 2015
Lopez-Mariano, Norma D. Business Mathematics. First edition. 2016.
Mankiw, Gregory N. Principles of Economics. 17th edition. 2015.

INTERNET SOURCE:

Forbusiness. (2020). What are Resources in Economics? The Production

Process. Retrieved from htpps://businesstute.com/frequently-
asked-questions/introductory-microeconomics-questions/what-
are-resources-in-economics/[Figure 1]

OpenStax College, Principles of Economics. OpenStax College. 21 June 2018.

https://openstax.org/details/books/principles-economics-2e

OpenStax College, Principles of Macroeconomics. OpenStax College. 21 June

2017. https://openstax.org/details/books/principles-macroeconomics-ap-
courses-2e

Slideplayer.com. (2020). Retrieved from https://slideplayer.com/slide/

7290492/[Figure 3]

Topper.com. (2020). Total Product, Marginal Product and Average Product.

Retrieved from https://toppr.com/guides/economics/production-and-
Costs/total-product-average-product-and-marginal-product/[Figure 2]

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