Franciscan College of the Immaculate Conception,

Baybay, Leyte, Incorporated

Baybay City 6521, Leyte
Philippines

COLLEGE OF BUSINESS MANAGEMENT AND

ADMINISTRATION MODULE

BA Core 11: 2
Basic Microeconomics
Management

ACADEMIC YEAR 2020-2021 l FIRST SEMESTER

 BA Core 11: Basic Microeconomics

hello my dear students!!

How are you? We are now in Module 2 of this course BA Core 11.
Thank you for staying with us.

There was no hard in module 1, it is just a matter of reading and

understanding. We are trying our best to simplify everything for easy
interpretation. Read the module and freely answer all activities. You can always and anytime
message me.

Read the course outline and make it a part of your study habit to refer to your outline and
be guided with what’s next and most of all comply the activities in your module.

Please be reminded of the following module guidelines:

And

 Learning modules will be distributed on a quarterly basis – prelim, midterm, prefinals

and finals. Make sure your cp#s and email address are correct.
 Reading materials with references/links and other requirements will be downloaded to
your registered Gmail accounts via Google classroom;
 Class meeting will be done via Google meet, for discussions and presentations. Our class
will create a group chat account in the messenger where we can discuss our concerns, if
internet connections is unstable;
 Please always keep posted, and enjoy as we educate ourselves through virtual learning.

Let us make our study more fun.

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 BA Core 11: Basic Microeconomics

COLLEGE OF BUSINESS ADMINISTRATION AND MANAGEMENT

OBE COURSE OUTLINE

AY 2021 - 2022
Course Number : BA Core 11
Course Title : Basic Microeconomics
Learning Facilitator : Lolita M. Alba
Contact Hours : 3 hours/ week
Pre-requisite : General Economics
Course Description :

The course deals with the study of concepts, theories and principles in economics
as introductory part in the study of microeconomics. It shows graphically how consumers
behave and suppliers respond to changes in prices in different market structures. As a concluding
activity, the students will analyze case studies to enable them to experience different behavior of
demand and supply in a volatile business environment.

Course Outcomes

CO1 Understand the theories, principles and concepts in microeconomics;

C02 Explain and illustrate graphically consumers behavior and suppliers’ responses to
changes in prices in different market structures; and

C03 Analyze case studies

COURSE CONTENT

TIME
COURSE CONTENT/SUBJECT LEARNING OUTCOMES
FRAME
MATTER

Module 1. The Theory of Consumers At the end of module 1 delivery, the

FIRST Behavior learner is expected to;
QUARTER
L1 Types of Theories of Consumers
Identify and discuss the types of theories
Behavior, Utility Function
and how these influence the consumers
buying behavior; for maximum
satisfaction
L 2 Consumption Function and Discuss the concept of indifference curve
Indifference Curve and how it is used as a tool to analyze
consumption behavior on the utility
theory.
L 3 Budget Line and Optimum
Explain the relationship between the
Combination indifference curve which represents that
Case: Demand for Big Mac.(New York the consumer likes and the budget line

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 BA Core 11: Basic Microeconomics
Times, May 12, 1991) which limits affordability.
Module 2. The Theory of Production At the end of module 2 delivery, the
learner is expected
SECOND
L1 The Concept of the Theory of Explain the concept of production
QUARTER
Production function, explain the law of diminishing
returns and identify lessons from it.

L2 Isoquant and Isocost: Concept and Explain the concept, its properties and
Properties the relationship between the lines of
isoquant and isocost curve;
L3 Productivity and Relative Resource
Efficiency Identify and explain the basic ways to
improve efficiency and the reasons for
Review Exercises return to scale and productivity
Module 3. The Theory of Cost and Profit At the end of module 3 delivery, the
learner is expected to;
THIRD
L1 The theory of Cost: Definition and Explain the theory of cost; identify and
QUARTER
Concept define the different types of cost
Explain profit theory; explain the effect
L2 Profit Theory: Definition and Concept of profit in the increase or decrease of
demand and supply.
Module 4. Market Structures At the end of module 4 delivery, the
FOURTH learner is expected
QUARTER L1 – Market Structure Analysis Identify the classification of market
Pure Competition structures and analyze the pricing and
Monopoly output relationship under each market
Oligopoly structure.
Course Requirements:
Attendance
Quizzes/ Performance Tasks
Quarterly Examinations
Major Learning Output
MIDTERM Problem Solving using graph

FINALS Case studies

References:

PAGOSO, DINIO & VILLASIS et al. INTROUCTORY MICROECONOMICS. 3rd Edition, Rex Bookstore,
2011
MARCELO, Danilo F.Jr. MICROECONOMICS: Theories and Applications. OBE Approach. ISBN: 978-
971-9654-35-3. Unlimited Books: Library Services and Publishing Inc., Intramuros Manila
h https://www.investopedia.com/terms/l/lawofdiminishingutility.asp
ttps://learn.saylor.org/course/ECON101
empforum.neas-seminars.com/Topic6400.aspx
https://www.google.com/search?
q=optimum+combination+microeconomics&oq=optimum+combination+microeconomics&aqs=chrome..
69i57.19699j0

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 BA Core 11: Basic Microeconomics

Students please be guided with the content of Module 2 below.

Module 2. The Theory of Production

Lesson 1 - The Theory of Production

LO 1 - Explain the concept of production function, explain the law of diminishing returns and
identify lessons from it.

Lesson 2 - Isoquant and Isocost: Concept and Properties

LO 2 - Explain the concept, its properties and the relationship between the lines of isoquant and
isocost curve

Lesson 3 - Productivity and Relative Resource Efficiency

LO 3 - Identify and explain the basic ways to improve efficiency and the reasons for return to
scale and productivity

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 BA Core 11: Basic Microeconomics
LESSON 2 – Theory of Production

We expect you this

after end of Lesson 1 - LO1 Explain the concept of production function, explain the law of
diminishing returns and identify lessons from it.
7

LEVELLING OFF
ACTIVITY 2

INTRODUCTION

Human desires are never ending whether it is a need or a want, especially now, we are
facing this COVID 19 pandemic, our normal lives are heavily affected. This new normal
conditions has change 360 degrees in our lives. Supply of product on some items are very low.
Production decreases because demand decreases thus closing of businesses.

This leads us to the heart of our discussion, the theory of Firm or the Theory of
Production. This the supply side of the equation.

Nature of Production
Production is defined as the transformation of inputs (the factors of production) into
output (the proucts or goods and services to be sold). It is the creation of goods and services to
satisfy human wants. It also any activity that increased consumer’s usability of goods and
services.
Producer is an individual who creates goods and services. He combines the major factors of
production such as land, labor , capital and entreporeneurial ability to produce goods and
services. Such creations give satisfactory or pleasure to human needs.
Firm – is an entity organization or unit that uses the factors of production for the purpose of
producing goods and services intended for sale with the aim of maximizing profit.
Factors of Production. In the study of economics, the following are considered as the major
factors of production
1. Land - all natural resources including land, everything beneath and above it; minerals, water,
air, trees, poultry, livestock, and all other forms of animal and vegetable life. They
are either the raw materials used in production or the sources o these raw materials.
2. Labor – all human resources who extract raw materials, processed these raw materials into
finished consumption or investment goods, transport and sell raw materials or finished
products or are engaged in services and professions.
3. Capital – materials such as machinery and equipment which man uses to extract and process
raw materials into finished goods. In a strict sense, capital only refers to man made
materials used to produce other goods.
4. Management or entrepreneurial ability – a human resosurce which organizes the other factors
of production (land, labor and capital) to generate goods and services which can satisfy
the needs of man.

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 BA Core 11: Basic Microeconomics
The Theory of Production
The theory of production is an analysis of output-input relationship. The factors of
production are combined to make goods and services. Choices has to be made what to produce
and how to produce. Production function tells of the maximum amount of output that can be
produced by each and every set of specified inputs (factors of production)
Production function states that output is a function of input
Q = f (X1, X2,…Xn) where: Q or q = the firm’s output produced
X1 = quantity of input 1(resources)
X2 = quantity of inpuit 2(resources)
Short run - short run is that period of time in which only variable input can be changed. value
of fixed input can't be changed. the duration of short run varies according to industry. For some
industries 1 month is a short run but for other industies 1 month is long run. ex. for steel industry
1 yr is also considered short run

Long run - Long run is that period of time in which both fixed and variable input can be
changed. value of fixed as well as variable input can be increases or decreased.. the duration of
long run varies according to industry. For some industries 1 month is a short run but for other
industies 1 month is long run. eg. for steel industry 1 yr is also considered short run, but for a
plastic factory, it is considered long run.

Production Analysis with One Variale Input (One Resource),

To simplify the following topics, let first consider a production process of affirm that uses
just one input, say, input L. such that the total product (output) produced from using certain
amount of input L is (TPL)
Total Product (TPL) – is the total amount of output obtained from a given quantity of input L
(labor).
Average Product (APL) – output per unit of input
TP
APL = L Marginal Product (L) = change in total output per unit
change in input L

MPL = TP/ L
= means Change

Marginal product
The marginal product is the output produced by one more unit of a given input. or we can say the
addition made to total product(output) by one extra unit of input. Eg. 5 workers are producing
100 cavans of rice and if 1 more labour is added ( now toal labour becomes 6), the output
increases to 130 cavans. So, the increase in output because of the additional unit of labour is 30
cavans (130-100), which is the marginal product of 6th unit of labour.
MP = change in output / change in input =30/1

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 BA Core 11: Basic Microeconomics

Units of Factor (n) TP MP = TPn-TPn-1 AP= TP/n

0 0 - 0
1 10 10 10
2 24 14 12
3 40 16 13.33
4 56 16 14
5 62 6 12.4
6 63 1 10.5

Plotting the above data on a curve would give the following graphs -

In the above diagrams, we will see

- As we employ more of factor 1, then TP goes on increasing.

- Initailly, average Product is less than Marginal Product.
- As, we keep on employing more and more input, Average and marginal product start declining
after a certain level.

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 BA Core 11: Basic Microeconomics
Law of Diminishing Returns
The production function shows that stretching the use of vriable resources against the
limits of fixed resources decreases additional product (MP). This is Law of Diminishing Returns
which is basically due to the limits of a fixed plant size. In Figure 2, the use of
++more labor inputs beyond Stage 1 strains the fixed input of cap;ital and makes both resources
less efficient as they complement each other. Furthermore, having too much of one resource and
too little of another can even result in a resource imbalance that dcreases production capacity
with a negative marginal product (MP) at Stage 3. Streching resource use to the point of
imbalance or overusing breeds counterproductive conditions which directly cause diminishing or
even negative returns. The saying “too many cooks spoil the broth,” applies to production.
The Lessons of Diminishing Returns
The Law of Diminishing Returns has three important lessons:
1. The size of the resources, given the rest as fixed, should not go beyond its product mazimizing
point. This means that the maximum labor inputs in Figure 2 whould only correspond to the
end of Stage 2 where output is maximize to determine plant capacity. Beyond this stage,
resource imbalance and diminishing returns are at their worst as production capacity
decreases.
2. Plant capacity can only increase with more resources combined unless technology changes.
Fig. 3 shows that all the points of TP1 move upward and rightward to form the higher
production function curve TP2. As both capital and labofr increase, sois the plant capacity
from points A and B.
3. Size of resources and capacity are basically complementary. Meaning inputs of production is
very important in any other forms of production.

Table 1. Production Function

Labor Total Product/Output Marginal Product Average Product
(Man Hours) (Units) (Units)
1 5 5 5
2 10 5 5 Stage 1
3 16 6 5.3
4 21 5 5.2
5 24 3 4.5 Stage 2
6 24 0 4
7 21 (3) 3 25
8 16 (5) 2 Stage 3
9 10 (6) 1.1 Figure 2
10 5 (5) 0.5
11 2 (3) 0.2 Stage 4
Stage 2
12 0 (2) 0
Stage3

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 BA Core 11: Basic Microeconomics

Stage 1
2 4 6 8 10 12 MP
AP
B

11
Output 1 111
TP2
A

TP1
Figure 3
Labor input

With the help of the concepts of TP, AP, and MP, production function maybe divided into
three stages 1, II, III.
Stage TP AP MP
1 Increases at an increases Increases and reaches its
increasing rate maximum point and then
diminishes
II Increases at a decreases Decreases and later reaches to
decreasing rate zero
III Decreases Decreases and Negative
reaches infinity

Note that at: Stage III – the TP curve has downward (-) slope
Stage II - The TP curve has steep (+) slope
Stage I - The TP cure has steeper (+) slope than at Stage II

Which stage is the most relevant stage in deciding how much additional input to use to produce
more output? At which stage does the law of diminishing returns (principle of diminishing
output) set in? STAGE 2
END OF LESSON 1

ACTIVITY 1

The activity below will test your understanding on the subject matter.
Fill up the table below and graph. Label your graph.
Labor (L) Total Marginal Average Product
Product (TP) Product (AP)
(MP)
1 3 0
2 7 4
3 12

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 BA Core 11: Basic Microeconomics
4 16
5 19
6 21
7 22
8 22
9 21
10 15

LET US ANALYZE
ACTIVITY 2.

Answer the following question and give your analysis.

1. Discuss the Law of Diminishing Returns.

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 BA Core 11: Basic Microeconomics

2. Give example that applies the law.

3. Identify the lessons of diminishing returns and discuss each.

FOLLOW THROUGH
ACTIVITY 3

Complete the table. Show the solution.

Labor Input TP = Total Product MP=Marginal Product AP=Average Product
1 6.00
2 9.00
3 14.00
4 17.00
5 22.00
6 27.00
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 BA Core 11: Basic Microeconomics
7 29.00
8 25.00
9 16.50
10 10.00
11 6.00
12 3.00
13 1.00
14 0.00

1. At what stage the most relevant and most efficient output set in. Explain.

ACTIVITY 4.

Graph the table in activity 5.

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 BA Core 11: Basic Microeconomics

LESSON 2 - Isoquant and Isocost: Concept and Properties

We expect you this

after end of Lesson 2 -
LO 2 - Explain the concept, its properties and the relationship between the
lines of isoquant and isocost curve

LEVELLING OFF
ACTIVITY 2

The Isoquant-Isocost Model

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 BA Core 11: Basic Microeconomics

This model illustrates mre dynamically how different plant sizes and resource
combinations determine different levels of resource efficiency and plant capacity. As a dynamic
tool of analysis, it also factors in the cost and budgetary limits of production.

The ISOQUANT

Theoretically, there are infinite combinations of resource inpts which determine the
same plnt capacity (maximum output). Isoquant is a curve which shows the different
combinations of inputs which yield the same level of output. In the study of the theory of the
firm, we have isoquant or indifference curve in the study of the consumers behavior. Figure 4
and table 4 present an isoquant with capital and labor as resource inputs. Between one point and
another along the curve, an inverse relationship exist between the resources as he capacity
foregone by using less of one is regained by using more of the other (see arrows). It is the
equality between capacity foregone nd gained that holds production capacity constant regardless
of resource combinations.

But resource input foregoine is not necessarily equal t resource input gained to maintain
plant capacity and their rate of substitutions is not even constant along the curve. Their Marginal
Rate of Substitution (MRS) is defined as how much of one resource is given up in order to use an
additional unit of the other, given a fix capacity. To use the isoquant in Figure 4, the MRS of
Capital (k) to Labor (L) is lmeasured as follows:

MRS = ∆Y axis
∆X Axis

Where additionally:
MRS= ∆k ∆= change
∆ L

Table 4. Isoquant
Labor Input Capital Input (K) Marginal Rate of Table 4 shows that less and less of
(L) Substitution capital inputs (K) are given up in
Change in L/change in K order to use an additional unit of
labor (L) as MRS decrease down the
1 30 -
line. In Figure 4, the shortening
2 26 4 length of the downward pointing
3 22.5 3.5 arrow represents K given up while
4 10.5 3 the rightward pointing arrow
5 17 2.5 represents additional L used. Thus,
6 15 2 the shortening vertical arrow
7 13 1.5 decreases as a ratio of the horizontal
8 12 1 arrow which is actually the trend of
the MRS as L substitute K. In
9 12 .5
10 12 0 15
 BA Core 11: Basic Microeconomics
addition, this trend shapes the isoquant as convex to the graph’s point of origin.

Capital

Labor
Figure 4.
Isoquant and Diminishing Returns

The Law of Diminishing Returns influences the behavior of the Marginal Rate of Substitution
(MRS) because MRS shapes the isoquant. In the same example, Marginal Product of Labor
L ∆ Q/ ∆ L decrease from more use while that of capital ∆Q/ ∆K increases from less use and
the opposite effect of diminishing returns. It follows that more labor (L) inputs are needed to
produc an additional unit of outputs as the increasing inverse of its decreasing marginal product
∆L/∆Q indicates. But, it also follows that less capital inputs (K) are only given up to reduce
output by the same unit as th decreasing inverse of its increasing marginal product also indicates.

The Isocost Curve and Its Hierarchy

Theoritically, there are infinite combinations of production resources that a given budget
can buy. In a two variable resource system, these combinations form the isocost curve. Figure 5
based on Table 5. Illustrates the isocost curve with capital and labor as r esource inputs. Between
one point and another along the curve, one resource is given up in exchange for the other because
of a fixed budget.

The same figure and table also shows that each budget is split between the resources at
varying purchase combinations. But as resource prices and their ratio are constant, so is the
marginal rate of substitution down the curve. Marginal Rate of Substitution (MRS) is defined as
how much of one resource should be given up in order to buy an additional unit of the other,
given a fixed budget. The MRS of capital (K) to Labor (L) in the example is computed as
follows:
MRS = ∆Y axis MRS = ∆K/∆L
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 BA Core 11: Basic Microeconomics
∆Y axis
Therefore MRS is also the capital input (K) that the price of a unit of labor (L) could otherwise
buy or (Price of L/Price of K)

Table 5. Isocost and Its Heirarchy

Budget = P10,000 Budget = P20,000
Capital (K) Labor (L) Capital (K) Labor (L)
5 0 10 0
4 4 8 8
3 8 6 16
2 12 4 24
1 16 2 32
0 20 0 40
Price of Capital = P2,000
Price of Labor = 500
Marginal Rate of Substitution (Capital/Labor) = 0.25

15

Capital
Figure 5
5 Budget of P20,000
Budget of P10,000

20 40

Looking at the table, there is a hierarchy of isocost curves which corresponds to different
budget and cost levels. Table 5 shows that the purchase of both capital and labor increases
proportionally with the budget for every combination. Therefore, a bigger budget forms a higher
isocost curve in Figure 5 bu with the same marginal rate of substitution (MRS) because of
constant prices and their ratio. Rather, volume and cost spell the difference between the isocost
curves in the hierarchy.

Productivity

Productivity is the efficiency and , therefore, the power of inputs to produce. This section
confines discussions to resource inputs which are basic to production. Productivity is measured
as output per unit of input which illustrated below:

Productivity = Q/I where : Q is output I is input

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 BA Core 11: Basic Microeconomics
According to that part of the input referred to, productivity is of two forms. Average
productivity is the efficiency of inputs taken as a whole and measured as their average output as
in the foregoing formula. On the other hand, Marginal Productivity is the efficiency of additional
inputs and the measures of its average output which is also illustrated below:

Marginal productivity= ∆Q/∆I Where:∆ = change

The profitable improvement in the overall resource efficiency in the foregoing is categorized as
an increase in Economic Efficiency. This is measured as output per monetary unit of input with
the latter expressed as monetary cost in the basic productivity ratio. (Q/I). Therefore economic
efficiency balances or reconciles the effects of two other types of productivity. Technical
Efficiency capitalizes on the output while Cost Efficiency gives emphasis to the cost of inputs.

Usually, output and cost are mutually conflictingto attain economic efficiency. Thus, the
technical efficiency of a machine is not necessarily profitable if it is too costly. To strike a
balance, its additional monetary returns should outstrip its cost. However, technological
advancement can optimize both output and cost to readily fit the piclture of economic efficiency.
For example, computers have become more powerful and cheaper to do more work at lower cost.

Overall Benefits of Productivity Improvement

 Increases profitability.
 Lowers operational costs.
 Optimizes resources.
 Improves customer service.
 Helps the organization for growth.
 Reduces waste and improves the working environment.
 Improves competitiveness.
 Reduces employee burnout.

This ends Lesson 2…

ACTIVITY1
Instructions: Complete the table of MRS for this Production isoquant.

Labor Input Capital Input MRS

1 37.00
2 43.00
4 36.00
6 17.75
7 9.25
9 21.00
10 16.50
11 15.75
14 3.00
16 12.00
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 BA Core 11: Basic Microeconomics

ACTIVITY 2

Graph the completed table in activity 3.

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 BA Core 11: Basic Microeconomics

ACTIVITY 3

Answer the following questions.

1. Productivity is defined as “a comparison between the quantity of goods

and services produced (Output) and the quantity of resources used to
produce these goods and services (Inputs)”.

1. Cite 2 examples of situations that depicts the definition of productivity.

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 BA Core 11: Basic Microeconomics

CONGRATULATIONS!
You have completed
Module 2 ACTIVITIES
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