BA-Mgt103- Operations Management (TQM) -Comprehensive Approach to Management

Lecture No.1 Introduction to Quality -Encourages Continual Improvement

-Simplifies Competitive Advantage
Quality -Enhances Company Reputation
-Performance that meets or exceeds -Improves Employee Morale
expectations. -Achieves Customer Satisfaction
- Performance that meets the customer’s needs.
- Consistently meeting customer needs and expectations. A Brief History of Quality Management
- Satisfying the customer today and getting better • Historical uses of quality management include the
tomorrow. precision involved in building of Egyptian pyramids,
- Quality is a dynamic state associated with products, interchangeable parts during Industrial Revolution, and
services, people, processes, and environments that meet statistical tools used for quality control during World War
or exceeds expectations and helps produce superior
value. II.
• Dr. Joseph Juran and Dr. W. Edwards Deming were
Introduction to Quality pioneers in the field (more later on these two quality
 - The primary objective is to enhance the quality of an gurus).
organization's outputs, encompassing both commodities • The Japanese integrated quality ideas and methods
and services, by means of ongoing improvement of throughout their organizations and developed a culture of
internal practices and compliance with industry continuous improvement.
standards.
- The key components of quality are service, promptness, W. Edwards Deming
product preparation, ambiance, and pricing. Quality  : Focus on bringing about improvements in product and
necessitates outcomes evaluated based on customer service quality by reducing uncertainty and variability in
satisfaction. goods and services design and associated processes (the
beginning of his ideas in 1920s and 1930s).
Introduction to Quality  Deming's philosophy on TQM is comprised of four
- TQM is a comprehensive initiative undertaken by a components: theory of knowledge, psychology,
business to achieve ongoing enhancement. Improvement appreciation for a system, and comprehending process
can be characterized as an employee's capacity to deliver variation.
products and services promptly and effectively, That is the  Higher quality leads to higher productivity and lower
essence total quality management - the focus on ensuring costs.
high quality.
- The term "total" signifies that the endeavor
encompasses every aspect and individual inside a The Deming Cycle
company. • Plan: study current situation
• Do: implement plan on trial basis
Total Quality Management • Study: determine if trial is working correctly
- places emphasis on the ongoing enhancement of • Act: standardize improvements
quality, involving the participation of all employees in the
pursuit of excellence in quality.
Joseph Juran
• Wrote Quality Control Handbook in 1951, a
Total Quality Management comprehensive quality manual.
: a management style that places emphasis on; • Defined quality as “fitness for use.”
-achieving customer satisfaction • Advocated use of quality cost measurement.
- involving employees, • Quality Trilogy: quality planning, quality control, and
- implementing process-oriented strategies, quality improvement.
- continuously improving performance,
- making decisions based on evidence, Philip B. Crosby
- fostering strong connections with suppliers, • Wrote Quality is Free in 1979, which brought quality
- and ensuring leadership commitment to establish a to the attention of top corporate managers in the U.S.
culture of excellence in quality • Crosby’s Absolutes of Quality Management include:
- Quality means conformance to requirements, not
Importance of Quality in Modern Business elegance.
-Cost Effectiveness and Improved Profitability - There is no such thing as a quality problem.
-Enhanced Productivity - There is no such thing as the economics of
-Minimize Redundant Processes quality; doing the job right the first time is always
-Prioritizes Innovation cheaper.
-Effective Marketing Strategy
- The only performance measurement is the cost
of quality, which is the expense of non-conformance.
- The only performance standard is Zero Defects (ZD).

Obstacles to Quality
-Additional costs
-Requires high level of technical expertise
-Possible resistance from employee
-Increased Level of Customer

Dissatisfaction at the Initial Stages of Implementation

-Requires continues training
-Outcomes are not immediately achieved.
-Sometimes discourages creativity.
BA-Mgt103- Operations Management (TQM) 4) Establishing Trust.
5) Facilitates Innovation.
Lecture No. 2
Quality Leadership Types of Leadership
1) Democratic (they accept:)
Attitudes,Beliefs, Behaviors, and Ethics : feedback, empower,freedom
 Attitude refers to one's immediate disposition or outlook 2) Autocratic (dictator)
towards an idea or object. : absolute power or intimidation
 Beliefs are notions formed from personal experiences 3) Laissez-faire (invisible hand of leader ship) (by adam
and deeply held convictions, which may not necessarily be smith)
grounded on logic or objective truth. : hands-off approach, let them be approach
Ethics include the fundamental ideas and values that 4) Transformational (postulates by douglas mcgregor,
individuals or communities employ to discern between theory x and y)
right and wrong. : motivation and challenge to improve
 Behavior pertains to the acts or conduct of persons in 5) Transactional
reaction to different circumstances. : reciprocal transactions, exchange
6) Bureaucratic
Ethical Theories : strict adherence to rules and standards
Teleological 7) Servant Leadership (helping ur ppl to success)
 - Derived from greek word “telos” which means “end”. : putting others success before your own
 - Idea that the outcome holds greater significance than 8) Coach-style (guiding) (a 1 on 1 process)
the actual deed. : mentoring your team to become better
 - Emphasis is placed on doing what will maximize 9) Charismatic (personal magnetism)
benefits and minimize harm. : charm, magnetism and persuasive influence
 - Rightness of action is determined solely by the amount 10)Strategic (always on the future)(long-term)
of good consequences they produce. ; managing for development and sustainability

Ethical Theories Mission , Vision , Goal, Value

Deontological The effective performance of any business organization
 - Derived from the greek word “deon” which means would not only require effective leadership but also a well-
“duty”. designed and highly inspiring mission, vision, values,
 - Emphasis is placed on doing what is right, regardless of and goals that will guide top officials and employees
the outcome. throughout their operation.
 - There exist adherence to an absolute and rule-based
standards. Mission is the organization’s reason for existence.
 - It is a duty-based system in which prioritizing one's Vision is a conceptual representation of the desired future
obligations takes precedence above seeking pleasure. state.
Goal is picture of what the group wants to happen or
Ethical Theories where it wants to be in the future.
Virtue Ethics Value statement tends to oversee and guide the
 - holds that the foundation of morality is in endeavors of individuals within the organization, aligning
the development of good character, not good acts. them towards shared objectives.
- virtues such as honesty, fairness, equality, and similar
qualities are considered to be the standards by which the
moral or immoral nature of all human activity is assessed.
- it is imperative that these characteristics remain
untainted by any influence, as disregarding or distorting
them would be deemed immoral.

Leadership and Quality

The significance of leadership in quality management
is enumerated below.
1) Establishes the overall atmosphere and
character of the organization.
2) Ensures that the objectives of the firm are in
line with the requirements and preferences of
the customers.
3) Quality management executives foster and
advocate for a culture of ongoing
improvement.
BA-Mgt103- Operations Management (TQM) • Customer service includes actions such as offering
Lecture No.3 Customer Satisfaction product suggestions, troubleshooting issues and
complaints, or responding to general questions.

Introduction Constructive and Destructive Criticisms

• Constructive criticism (positive) is characterized by its
• A primary element of TQM is the organization's ability to uplift, make suggestions, and present viable
emphasis on the needs of the customers. answers.
• Customer satisfaction is the essential and vital • Destructive criticism is harsh, insulting, and may even
component that sustains the company's competitiveness mock our failures.
and survival. The existence of customers is essential for
the provision of any service or product. The rise in rate of Customer Communications
customer would result in a corresponding increase in • It refer to the contacts that take place between
profit. customers and businesses through a range of media,
• TQM directly focuses on and gives priority to fulfilling including digital platforms and face-to-face encounters.
the customers' needs leading to customer satisfaction • Customer conversations can occur through various
which is essentially the primary goal for all businesses. channels, including telephone, text messaging, online
chat, or in-person interactions.
Internal customers • Omni-channel customer communication is a
- It refer to individuals or entities within the business, fundamental requirement in a contemporary contact
such as employees and suppliers. center since it enables customers to express their channel
- Internal customers ensures quality of products and preferences and enables enterprises to deliver consistent
services. and pertinent messaging.

External customers Importance of Customer Communications

- It refers to individuals or organizations that directly • It increases profitability
purchase or utilize a company's products or services. • It enhance profitability by boosting the long- term value
- External customers are needed to bring revenue to the of your customers.
business. • Enhancing customer communication enhances the
perception of your brand.
Customer Perception • Communication is a key element for ensuring quality
• It refers to the emotional response that a customer has customer service.
towards a firm. • It drives customer satisfaction.
• The opinions, feelings, and beliefs customers have about • It resolves issues and concerns.
a product or a service. • It develops trust and loyalty.
• Consumers are inclined to engage in transactions with
organizations they have confidence in.
• It can be influenced by various factors such as past
experiences, price, quality, usability, location, customer
service, marketing, reputations, and recommendations.

Customer Relations
• It include the strategies and techniques employed by a
firm to interact with its consumers and enhance their
overall customer experience.
• This entails offering solutions to immediate obstacles
and actively devising strategies that are focused on
achieving client success and build and maintain customer
relationships.
• Customer relations encompass not only marketing and
sales teams, but also include their substantial impact on
the company's relationships with customers.

Customer Service
• It refers to the support and assistance that your firm
offers in order to guarantee the success and satisfaction of
customers.
• While companies can offer proactive customer service
capabilities, the majority of customer service activities are
provided in reaction to consumer actions.
BA-Mgt103- Operations Management (TQM) making choices and decisions, as well as to avail
Lecture No. 4 themselves of opportunities pertaining to their own
growth and matters that are of importance to them.
Employee Involvement • This can be achieved by gaining access to information,
resources, competencies, or making institutional reforms.
Introduction
Engaged employee - is someone who demonstrates a
• Participation and teamwork -- the foundations of strong commitment and deep emotional attachment to
employee involvement (EI) -- represent core principles of the organization.
total quality management and are a natural extension of Non-engaged employee - is the one who is disinterested,
effective human resource management practices. going through the motions, lazy, merely fulfilling time
• Informal communication, open door policies, suggestion rather than exerting effort.
systems, and teams encourage employees to share their Actively disengaged - individuals who experience profound
knowledge and use their abilities to improve the processes dissatisfaction in their professional occupations. They
that lead to customer satisfaction. engage in deliberate efforts to undermine their
teammates and ruin projects.
• In a TQM culture, employees are encouraged to Reasons people are disengaged? Inadequate or
challenge ineffective company policies and bring quality ineffective communication, supervision, co-
concerns directly to top management. workers, policies, employees aspire to excel,
• Employee involvement- any activity in which employees insufficient planning among others.
participate in work- related decisions and improvement
activities, with the objectives of tapping creative energies Motivation
of all employees and improving their motivation. - It refers to the underlying reasons that drive a person
to take action.
Benefits of EI - The cognitive process that triggers, directs, and
o Employees make better decision by using their expertise sustains activities aimed at achieving specific objectives.
o Employee support the decision in implementation Demotivation
o Employees are better able to pinpoint the area of  - It is the opposite of motivation and is generally defined
improvement as "negative influences that counteract existing
o Employees are in better position to take corrective motivation.“
decisions - It refers to external factors that decrease or weaken the
o Employees involvement remove conflicts and improve motivation behind one's behavior, intentions, or
communication continuing actions.
o Increase morale by having a sense of ownership
o In better position to accept changes Maslow’s Theory of Motivation
o Increase commitment

Empowerment
• It is an environment in which people have ability, the
confidence, and the commitment to take
responsibility and ownership to improve the process and
initiate work, satisfy customer in order to achieve goals.
• It is different from delegation and enrichment of work as
in this there is ownership of work and the whole work is
assigned to one person.
• In order to create empowered environment three
condition are necessary
Herzberg Two-Factor Theory
3 Conditions for Empowerment
1. Every one must understand the need of change. People Relationship to Quality
of high skill, education and experience want change and Work Quality
empowerment. Internal locus of control is also important Employee Satisfaction
2. The system need to change to new model. Motivate Expansion of Cooperative Efforts
individuals, freedom to act, Enhancing Efficiency
3. The organization must enable its employees. Means Low Employee Turnover
enhance their skills, knowledge, and information. Improved Productivity

Stakeholder Empowerment
• It refers to the act of enhancing the capacity and self-
assurance of stakeholders to exercise their capacity in
Economics 2 ARMS OF ECONOMICS
- is a study of scarcity Positive Economics
-study how people respoond to indentives and make - It is the stream of economics that Has an objective
decisions approach, relied on facts
-the study of wealth and finance Normative Economic
-the study of how work and business run - It focuses on the ideological, perspective- based,
opinion-oriented statements towards economic activities.
MICROECONOMICS
- explains why and how different things have Ceteris Paribus Assumption
different values, how people make financial • Ceteris Paribus is a Latin Phrase means 'with other things
decisions, and how they can trade, work together, that are same' or 'other things being equal or held constant ’.
and cooperate in the best way. -Assists in siolating mulitiple independent variable influencing
-it also looks how people divide and share work, set a deopendent variable
up and run business, and deal with uncertainty, risk,
strategy. ECONOMIC SYSTEMS
MACROECONOMICS -serves as a regulatory system for controlling different
-looks at the company as a Whole aspects of production and distribution.
SCARCITY- the central problem of economics. 1. Traditional Economic System (OLDEST)
-when supply of a resources cannot meet demand - Each member of a community or society has a
-scarcity determine value specific role that contributes to the whole progress of the
CIRCULAR FLOW of MODEL community.
- shows how money helps to turn the resources into 2. Command economic system
goods and services that people buy, generating - the government plays a key role in directing and
more money. intervening in business processes that provide essential good
-HOUSEHOLDS---factor for Production (labor)---BUSINESS--- and services to the community.
goods & services---HOUSEHOLD- 3. Centrally planned economic system (is an offshoot of the
command economy)
-BUSINESS---personal income (wages,dividdends)--- -the society creates and dictates economic plans to
HOUSEHOLDS---expenditures---BUSINESS--- drive the production, investments and allocation of goods,
services and resources.
4. Market economic system
THE CONCEPT OF OPPORTUNITY COST -communities, firms and proprietors act in self-
-refers to what you have to give up to buy what you want in interest to decide how to allocate and distribute resources,
terms of other goods or services. what to provide and who to sell to.
5. Mixed economic system
FOUR BASIC ECONOMIC QUESTION - A mixed economic system combines two or more
-Societies or communities answer the economic questions in economic practices into one central system.
different ways. - Mixed economies are common worldwide, offering
1. What goods and services will be produced? benefits but also having some weaknesses.
2. How will goods and services be produced?
3. Who will consume the goods and services?
4. How should the goods and services be distributed
among the people?

The 3 e's of economics

1. ECONOMY- Getting the right inputs at the lowest cost (or
getting a good deal).
This factor also happens on the situation where, as
the quantity of output goes up, the cost per unit goes down.

2. EFFICINECY- Getting the most from the inputs (or getting a

lot for the efforts).
The term "efficiency" that uses the least amount
refers to the peak level of inputs to achieve the highest
amount of performance of output.

3. EFFECTIVENESS- Getting the expected results from the

outputs (or doing the right things).
The concept of effectiveness is often used in
economics to describe phenomena occurring in the process
of managing limited resources.
I. BASIC ANALYSIS OF SUPPLY AND DEMAND

Definition of Market:
● A place where buyers and sellers can meet to facilitate the exchange of goods and services.
● A collection of people who wish to buy a specific product or service in a particular place.

Key Characteristics that Define a Market:

1. Availability of an Arena
2. Buyers and Sellers
3. Commodity to be Purchased or Sold

Demand – An economic concept that relates to a consumer’s desire to purchase goods and services, and the
willingness to pay a specific price for them.
Classifications of Demand:
1. Market Demand – The total quantity demanded by all consumers in a market for a given good.
2. Aggregate Demand – The total demand for all goods and services in an economy.

Law of Demand – Concerns consumers’ changing desire to purchase goods and services at given prices.
Demand Curve – Visually demonstrates how the decreasing price of a product increases the quantity purchased.
Demand Analysis – The research conducted by companies to aim in understanding a customer’s demand for a
certain product and determining if they can successfully enter the market and obtain the expected profit.
Methods in Demand Analysis:
1. Evaluating Customers’ Response Towards a Product
2. Formulating a Pricing Policy
3. Sales Forecasting
4. Establishing a Production Policy

Change in Quantity Demanded – The demand curve moves along the existing demand curve (up or down), caused
by a change in price.

Change in Demand – A shift in the entire demand curve (left or right), caused by a variety of factors.

Supply – Describes the total amount of a specific good or service that is available to consumers at a specific price.
Methods in Supply Analysis:
1. Market Structure
2. Competition
3. Supply Chains
4. Substitute Goods and Services
5. Agency Value as a Customer (Supplier Referencing)

Change in Quantity Supplied – The change in the level of the quantity that the seller wishes to sell at a particular
price due to a change in the price of the commodity while other factors remain constant, represented as a movement
along the supply curve.
Two Cases of Movements Along the Supply Curve:
1. Expansion of Supply (Upward Movement) – As the price increases, the quantity supplied increases as well.
2. Contraction of Supply (Downward Movement) – As the price decreases, the quantity supplied decreases as
well.

Change in Supply – The change in the level of the quality that the seller wishes to sell at a particular price due to a
change in the factors of the supply while the price remain constant, represented as a shift in the supply curve.
Two Cases of Shifting in the Supply Curve:
1. Rightward Shift (Increase in Supply) – The supply for a commodity increases at the same price, occurs due
to the changes in other factors than the price.
2. Leftward Shift (Decrease in Supply) – The supply for a commodity decreases at the same price, occurs due
to the changes in other factors than the price.

Best Practices for Conducting Demand and Supply Analysis in a Competitive Environment:
1. Define the market of interest.
2. Draw the supply and demand curves for the market being analyzed.
 3. Find the equilibrium point.
4. Analyze the changes in demand and supply that may occur due to various factors.
5. Determine the new equilibrium point after the occurrence of the changes in supply and curve.
6. Evaluate the effects on consumer and producer surplus, which measures the net benefits of buyers and
sellers in a market.

2 W’s and 3 H’s when Defining a Market:

1. What is the product or service being analyzed?
2. Who are the buyers and sellers of the product or service?
3. How similar or different are the products or services offered by different sellers?
4. How easy or difficult is it for new entrants to enter or exit the market?
5. How do buyers and sellers communicate and exchange information?

Equilibrium Point – Reflects the optimal allocation of resources in a competitive market where buyers and sellers
maximize their utility and profit respectively.
Consumer Surplus Producer Surplus
● The difference between the maximum amount that ● The difference between the minimum amount that
buyers are willing to pay and the actual amount the sellers are willing to accept and the actual
they pay for a good or service. amount they received for a good or service.

Evaluating the Effects on Consumer and Producer Surplus – Comparing the areas under and above the demand
and supply curves, before and after the changes have occurred.
Surplus Shortage
● Exists when the price is above equilibrium, ● Exists when the price is below equilibrium, leads
encourages sellers to lower their price to eliminate sellers to increase their prices to gain more profit.
the surplus.

Price Controls – The government-mandated minimum (price floors) and maximum (price ceilings) price set for
specific goods and services, implemented as a means of direct economic intervention on mostly essential items.

II. CONCEPT OF ELASTICITY

Price Elasticity of Demand (sensitivity of a consumer) - A measurement of the change in consumption of a product
in relation to a change in its price.
Price Elasticity of Demand and its Equivalents:
1. Relatively Elastic = PED is greater than 1. (PED > 1)
2. Relatively Inelastic = PED is less than 1. (PED < 1)
3. Perfectly Elastic = PED is infinite. (PED = )
4. Perfectly Inelastic = PED is zero. (PED = 0)
5. Unitary Elastic = PED is equal to one. (PED = 1)

Elasticity of Demand – Refers to the shift in demand for an item or service when a change occurs in one of the
variables that buyers consider as part of their purchase decisions.
Elastic Products Inelastic Products Unitary Elastic Products
● Goods or services that have ● Goods or services that have ● Goods and services that have
an elastic demand that an inelastic demand that a demand or supply that
changes in response to price doesn’t changes in response changes in proportion to price
changes, luxury items or to price changes, necessity changes, basic electronics
those that have substitute items or those that have no and appliances.
products. substitute products.

Four Types of Elasticity:

1. Price Elasticity of Demand (PED) – Customers are highly sensitive to changes in prices.
 2. Cross Elasticity of Demand (XED) – Changes in the price of one product prompt changes in the demand for
another, conditioned for complimentary or substitutional goods.
3. Income Elasticity of Demand (YED) – The quantity of demand tends to decline during a decrease in the
level of income, even if all other factors remain the same.
4. Advertising Elasticity of Demand (AED) – Focuses on the relationship between customer demand and a
seller’s advertising efforts, measures the effectiveness of advertising in elevating customer impressions.

Determinants of Elastic Inelastic

Elasticity of Demand
1. Availability of Substitutes ● Products that are easily ● Products that are not easily
substituted. substituted.

2. Urgency of Purchase ● Urgent Purchase ● Not Urgent Purchase

3. Duration of Price Change ● Short-term Sales or Prices ● Long-term Sales or Prices

4. Percentage of Income ● Higher Percentage of ● Lower Percentage of

Household Budget Household Budget

5. Necessity ● Luxurious and Non-essential ● Essential and Addictive Items

Items

6. Brand Loyalty ● No Brand Loyalty ● High Brand Loyalty

7. Buyer ● When someone else pays for ● When the buyer directly pays
their purchase. (Other for their purchase. (Personal
People’s Money) Expense)

III. CONSUMER CHOICE AND UTILITY MAXIMIZATION

Consumer – The final user of an item – a good or service.

Consumer Behavior Consumer Theory Customer Preferences
● Refers to how consumers make ● The study of how people decide ● A theory that explains
decisions about what to buy and to spend their money based on how consumers make
how much they are willing to pay their individual preferences and decisions, based on
for different goods and services, budget constraints. the idea that
also figures out how much a consumers are rational
consumer values each good and and will choose the
how their preferences change product or service they
along changes in factors of believe will satisfy their
purchase. needs.

Two Main Models in Understanding Consumer Behavior:

1. Utility Maximization Model – Assumes that consumers will try to maximize their utility or satisfaction by
choosing the best combination of goods given their budget.
2. Indifference Curve Model – A chart showing various combinations of two goods or commodities that
consumers can choose, represent how consumers might demand different bundles of goods.

Three Basic Assumptions about Human Behavior:

1. Utility Maximization – Individuals are used to make calculated decisions when making a purchase, which
brings them the greatest benefit. (Maximum Utility)
2. Non-satiation – People are seldom satisfied with one trip to the shops and always want to consume more.
 3. Decreasing Marginal Utility – Consumers lose satisfaction with a product the more they consume it.

Inputs Required in Consumer Theory:

1. A Full Set of Consumption Options – Any initial bundle that the consumer currently holds.
2. A Set of Prices Assigned to Each Bundle – How much utility a consumer derives from each bundle in the
set of options.

Good Service
● A tangible item that consumers desire or own. ● An intangible and non-physical entity that can be
performed at a distance and still sought by
consumers.

Normal Good Inferior Good

● A product whose demand increases when a ● A product whose demand decreases when a
consumer’s income increases. consumer’s income decreases.

Private Service Public Service

● A need that is paid by a consumer and is provided ● A service provided by the government to ensure a
by a firm or another person. provision of certain quantity of service for
everyone at a low cost.

Uses of Customer Preferences:

1. Understanding what customers want from a product or service.
2. Creating new products or services based on what customers want.
3. Improving the quality of existing products or services.

Abraham Maslow – A social psychologist who was interested in a broad spectrum of human psychological needs,
rather than on individual psychological problems.
Maslow’s Hierarchy of Needs – Organizes the five different levels of human psychological and physical needs in
order of importance.
Pyramid of Hierarchy of Needs:
1. Physiological Needs – Food, Water, Shelter, and Warmth
2. Security Needs – Safety, Employment, Assets, and Savings
3. Social Needs – Family, Friendship, Intimacy, and Belongingness
4. Esteem Needs – Self-worth, Accomplishments, Confidence, and Recognition
5. Self-actualization Needs – Fulfillment, Creativity, Acceptance, and Morality

Human Motivation – Directs human behavior in fulfilling various needs.

Economic Satisfaction – A positive assessment of the economic outcomes of a relationship, also refer to the
positive feelings of a customer about the economic rewards of an exchange.
Utility – A subjective measure of satisfaction on individual gets from the consumption of the commodities, dependent
upon human needs and immeasurable.
Measurements of Utility:
1. Cardinal Approach – Expressing the customer’s satisfaction in cardinal numbers such as quantitative
numbers.
2. Ordinal Approach – Expressing the customer’s satisfaction by comparing commodities and giving them
certain ranks.

3.

Types of Utility:
1. Total – The sum of the total satisfaction from the consumption of specific goods or services, increases as
more goods are consumed.
2. Marginal – The additional satisfaction gained from each extra unit of consumption, decreases with each
additional increase in the consumption of a commodity.
 3. Average – The utility per unit of a good or service consumed, calculated by the total unit of consumption by
the number of total units.

Types of Economic Utility:

1. Form – Refers to the specific product or service that a company offers.
2. Place – Refers to the convenience and readiness of the services available at a place to the customer.
3. Time – Refers to the ease of availability of products or services at the time when a customer needs.
4. Possession – Refers to the benefit a customer derives from the ownership of a company’s product.
Total Welfare – When a market produces at its equilibrium price and quantity where there is an effective allocation of
inputs, the combined areas of consumer and producer surplus (the sum of red and green areas).
Definition of Marginal Rate of Substitution (MRS):
● Measures the willingness of a consumer to replace one good for another as long as the same satisfaction is
maintained.
● The slope of the indifference curve at any given point along the curve which displays a frontier of utility for two
goods.
● Forms a downward and negative-sloping convex curve that shows more consumption of one good in place of
another.
● A critical component for businesses to understand when analyzing consumption trends or for government
entities to understand when setting public policy.
● When a person does not care for substituting one item for another, their MRS is zero since they neither gain
nor lose any satisfaction from the trade.

Budget Line (Budget Constraint) – A graphical delineation or a straight line that exhibits all the combinations of two
commodities that a consumer can manage to afford at the provided market prices and within the particular earning
degree.
Two Basic Elements of a Budget Line:
1. The Consumer's Purchasing Power (Income)
2. The Market Value of Both
Features of a Budget Line:
1. Negative Slope - Indicates a reverse correlation between the two products.
2. Straight Line - Indicates a continuous market rate of exchange in individual combinations.
3. Real Income Line - Denotes the income and spending size of a customer.
4. Tangent to Indifference Curve - Also known as the consumer's equilibrium, the point where the indifference
curve meets the budget line.
Assumptions of a Budget Line:
1. Two Commodities - Assuming that customers spend their income to purchase only two products.
2. Income of the Customers - Limited and designated to buy only two products.
3. Market Price - The cost of each commodity that is known to the customers.
4. Expense is Similar to Income - Assuming that customers spend and consume their entire income at the same
time.
Classifications of Shift in the Budget Line:
1. Shift Due to Change in Price - An inward or outward rotation on the budget line due to a change in the amount
of product, depending on the change in price.
2. Shift Due to Change in Income - A parallel shift to the original position of the budget line due to a change in the
purchasing potential.
Benefits of Budgeting:
1. Provides a time frame required to control finances.
2. Highlights cashflow shortages or financing requirements, etc.
3. Provides the basis for taking corrective action if budgeted figures do not match actuals.
4. Variance analysis or financial analysis, or investigation to make changes in the budget.
5. Provides a set of standards for performance evaluation.
6. Provides benchmarks that management can use to evaluate the performance of those responsible for carrying out
plans.
7. Roles of staffs members are defined and understood.
8. Transparency builds good relationships and develops morale in the workplace.
9. Develops a system to provide feedback on performance.
Limitations of Budgeting:
1. Are only assumptions and estimations that provide uncertainty.
2. Expensive, initially and during its operations.
 3. Needs to monitor the situation to ensure the benefits.
Factors in Preparing the Budget:
1. Timeliness of Budget - Must be developed, completed, and communicated well before the period to which they
relate.
2. Budgeting Period - Should be long enough to show the effect of management policies, yet short enough so that
estimations can be made with reasonable accuracy.
3. Regular Review - Commonly conducted on a monthly basis, or at the end of each quarter or financial year.
4. Rolling on a Continuous Basis - Continually updated so that it will always reflect plans for the same length of
time.
5. Longer-range Budget - Commonly used by business plans to acquire plant and equipment over a long period of
time, also known as capital expense budget (capital expenditures).
6. Budgeting Process Overview - Includes estimated cashflows such as sales and expenses that are calculated
per month with a year-to-date total, compares the actual results at the end of the period where variances are
analyzed and investigated.

IV. THE THEORY OF FIRM: PRODUCTION AND COST

Factors of Production:
1. Land and other Natural Resources - Naturally found and can be used for the production of goods and services.
2. Labor (Physical and Mental) - Human effort that can be applied to production.
3. Capital - A resource that is produced and can be used to produce other goods and services.
4. Entrepreneur - A person that seeks to earn profits by finding new ways to organize factors of production, uses
new technology for a more convenient production system.

Two Forms of Labor:

1. Skilled Labor - Refers to labor that requires little to no training or education.
2. Unskilled Labor - Refers to labor that requires a high level of training or education.

Ways of Increasing the Amount of Labor Available to an Economy:

1. Increase the total quantity of labor.
2. Increase the amount of human capital possessed by workers.

Labor Intensive Capital Intensive

● A business process or industry that requires a ● A business process or industry that requires a
large amount of labor to produce its goods or large amount of investmets to produce its goods
services, the costs for securing the necessary or services, has high percentage of fixed assets
workers outweigh the capital costs. and high levels of depreciation.

Operating Leverage - A measure of how revenue growth translates into growth in operating income, requires companies
to have a high volume of production to provide an adequate return on investment.

Theory of Cost - The monetary value of all sacrifices made to achieve an objective, the production cost provides the floor
to pricing.

Production Functions - Mathematical equations or representations of the relationship between tangible inputs and the
tangible output of a firm during the production of goods, enables the maximum production of goods by depending on the
price factor and output levels observed by the producers.

Accounting Cost (Explicit Cost) Economic Cost

● The costs of business necessities, determine a ● Theoretical or potential expense that includes
company's total expenses and gross profit. accounting costs plus implicit costs, helps
determine if an alternative option would yield a
higher profit.
 Outlay Cost Opportunity Cost
● Incurred to acquire an asset or execute a strategy, ● The value of the best alternative that is given up
refer to the initial cost of a project or activity. when a choice is made between several options.

Direct Cost (Traceable Cost) Indirect Cost (Non-traceable Cost)

● Easily identified and traced to a particular product, ● Not easily identified and traced to a particular
operation, or plant. product, operation, or plant.

Fixed Cost Variable Cost

● Business expense that remain the same ● Business expense that change as a business's
regardless of how much a business produces or production or sales volume increases or
sells. decreases.

Short Run Long Run

● A conceptual time period where firms are limited ● A conceptual time period where firms can adjust
by their existing production capacity, the quantity all factors of production, the quantities of all all
of one input is fixed and the quantity of other inputs and costs are variable.
variables are varied.

Leontief Production Function Cobb-Douglas Production Function

● A type of function that describes how factors of ● Calculates the aggregate production function or
production are used in fixed proportions to the maximum output that can be produced given
produce a quantity of output. the quantities of the factors of production.

Total Cost Average Cost Marginal Cost

● The economic cost of ● Measures the amount of ● The change in total
production, including both money that the business has production cost that comes
fixed and variable costs, must to spend to produce each unit from making or producing one
balance with the revenue to of output, divided by the total more unit, calculated by
obtain a profitable business cost of production by the total dividing the change in
operation. number of units produced. production costs by the
change in quantity.

Law of Diminishing Returns Returns to Scale (Economics of Scale)

● As the investment on a particular area increases, ● Measures the effect of a proportionate increase in
the rate of profit cannot continue to increase if all production variables in the long run.
other variables remain constant.

Diminishing Marginal Returns (Diminishing Marginal Negative Productivity (Negative Returns)

Productivity)
● A reduction in the efficiency of a production ● Occurs when less output is produced without a
system, an increase in input creates lower units of decrease in input, or when the same output is
output. produced with more input.

Common Examples of Law of Diminishing Returns:

1. Social Media Marketing
2. Agriculture
 3. Manufacturing
4. Enterprise Resource Planning (ERP)
Jacques Turgot David Ricardo Thomas Robert Malthus
● The first economist to ● A classical economist that ● A classical economist that
articulate the effects of the referred the law as the used a variation of the law in
law in agriculture, he argued intensive margin of his population theory, stated
that applying equal quantities cultivation, showed how that the food production
of capital and labor will additional capital and labor increases arithmetically and
increase the outputs and that is added to a fixed place the population grows
steadily decrease at some generates successively geometrically which outgrows
point after increasing the smaller increases in output. the food production.
inputs.

Classical Economists Neoclassical Economists

● Assume that the most important factor in a ● Argue that the consumer's perception of a
product's price is its cost of production, believed product's value is the driving factor in its price,
that the law of diminishing returns was caused by believed that the law of diminishing returns was
a decrease in the quality of inputs. caused by additional units of labor added to a
fixed amount of capital.

Profit Maximization - A tendency of a business firm to maximize their profits by using the most efficient methods and
equalizing the marginal costs and revenues (MR = MC), and increase the level of its production.
Hall and Hitch's Theory - The primary objective of every firm is to generate profits, also assumed by classical
economists.

V. LABOR MARKET: WAGES IN PERFECT COMPETITION

Factor Market (Resource Market) Product Market

● Where the factors of production are bought and ● Where finished goods and services are sold to
sold. consumers.

Labor Market Equilibrium - Occurs when the supply of labor (workers) equals the firm's demand for labor.
Conditions for Labor Market Equilibrium:
1. Firms are price-takers.
2. The supply of labor is elastic.
3. All firms in the market aim for profit maximization.
4. A firm's demand for labor is a derived demand, a demand for a factor of production that results from the demand
for another intermediate good.

Perfectly Competitive Labor Market - A market where many buyers and sellers can't influence the market wage, firms
can hire all the labor they wish at the going market wage.

Equilibrium in a Perfectly Competitive Labor Market:

1. Supply curve is perfectly elastic (horizontal). - Many workers are offering the same services, firms pay their
workers with equilibrium wage.
2. Demand curve is downward sloping. - Firms will keep on hiring workers as long as profit is gained, which is
equivalent to the marginal product labor.

Marginal Resource Cost (MRC/MFC) Marginal Product Labor (MPL)

● The supply of labor in a firm, the cost for hiring an ● The benefit for hiring an additional worker, the
additional worker and is equivalent to the highest wage a firm would willingly pay for a
 equilibrium wage. worker and becomes the firm's demand for labor.

Ensuring Labor Market Efficiency - Maximizing the output from its two primary inputs: labor and capital.
Increase in Wages - Happens when firms keep up with the inflation or due to the pressure from the trade unions.
Producer Surplus Worker Surplus
● The difference between the highest wage being ● The difference between the competitive wage that
offered to a worker and the actual wage earned. is earned by the worker and the opportunity cost
of the worker’s time.

Involuntary Unemployment - When workers are willing to be employed but no employer hires them, most likely to occur
during inflation.
Effect of Minimum Wage in the Labor Market - As the labor supply and demand for labor did not meet, the labor supply
exceeds the demand which causes for labor surplus (unemployment).
Common Challenges Faced in the Global Labor Market:
1. Shortage of Skilled Workers
2. Skills Gap
3. Changing Work Demographics
Challenges in Regulating the Labor Market in Developing Countries:
1. Getting the right balance between enabling decent working conditions and incomes for employees.
2. Allowing employers the flexibility to run their operations efficiently and at a reasonable cost.
Two Policies in Regulating the Labor Market:
1. Policies are usually predicated on wage employment.
2. Low Compliance
Weak Enforcement Capacity - A serious constraint for achieving labor market regulation. This happens because
employers tend to avoid complying to regulations and employees does not receive the right amount of compensation.

VI. FORMULAS

a. Equilibrium

Qd = Qs

● Qd = Quantity Demanded
● Qs = Quantity Supplied
b. Price Elasticity of Demand

PED = %ΔQD ÷ %ΔP

● PED = Price Elasticity of Demand

● %ΔQD = Percentage of Change in Quantity Demanded
● %ΔP = Percentage of Change in Quantity Supplied
c. Production Function

Q = f (K, L, P, H)

● Q = Number of Outputs
● f = Function of the Inputs
● K = Capital or Tangible Assets
● L = Labor
● P = Land or Natural Resources
● H = Entrepreneurship

(The formula for the function may vary depending on the inputs for production.)
d. Cobb-Douglas Production Function

Q = A • K α • Lß

● Q = Number of Outputs
● A = Total Factor Productivity (TFP), a constant
● K = Capital or Tangible Assets
● α = Output Elasticity of Capital (1 - ß)
● L = Labor
● ß = Output Elasticity of Labor (1 - α)
e. Average Cost

AC = TC ÷ Q

● AC = Average Cost
● TC = Total Cost
● Q = Number of Units Produced
f. Marginal Cost / Marginal Resource Cost

MC = ΔTC ÷ ΔQ

● MC = Marginal Cost / Marginal Resource Cost

● ΔTC = Change in Total Cost
● ΔQ = Change in Quantity
g. Marginal Product Labor

MPL = ΔQ ÷ ΔL

● MPL = Marginal Product Labor

● ΔQ = Change in Quantity Produced
● ΔL = Change in Labor