SS 203-4
Basic Economics with Taxation
and Agrarian Reform
by:
DR. VICENTE S. BETARMOS, JR.
First Semester 2020 – 2021
Lesson 2 Production: Market and Business Organization
Intended Learning outcomes
At the end of the lesson you must have:
1. Explained elasticity, production and cost
2. Compared the different market models and business organization
Activate Prior Knowledge:
Let’s try this!
Direction:
1. Chose a partner through text or net and discuss this: benefits of elasticity of
demand or supply.
2. Same partner, contact other partners and discuss market models and business
organization.
Acquire New Knowledge:
Direction: Do active reading on this topics to supplement understanding!
Producers, sellers and suppliers wanted to make sure that the products they produced
will have lasting impact to potential consumers to sustain their businesses. By doing so, revenues
are observable and a flow of profits comes next. Buyers maybe anxious to give up the price thus
need to study a concept of elasticity.
The Concept of Elasticity
Elasticity – refers to the reactions or response of the buyers or sellers to changes in prices of
goods and services. It is the sensitivity of the price and the response added in determining
exchange of goods and services. Elasticity therefore applies to both demand and supply.
Types of elasticity
1. Elastic – a change in price results to greater change in quantity demanded or supplied.
more than 1, it is elastic
2. Inelastic – a change in price results to a lesser change in quantity demanded or supplied
less than 1, it is inelastic
3. Unitary – a change in price results to an equal change in supply or demand
equal to 1, it is unitary
4. Perfectly elastic – without change in price there is infinite change in quantity demanded
or supplied (demand: purely competitive)
5. Perfectly inelastic – a change in price creates no change in quantity demanded or supplied.
Formula for Elasticity:
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄
𝐸=
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃
where:
Q2 − Q1
𝑄=
𝑄1
P2 − P1
𝑃=
𝑃1
Example: Table below illustrates the relationship of price and quantity in relation to price
changes. Determine the elasticity of May 2013 and August 2014.
Months and Year Shoes Price Quantity Demanded
May 2018 2500 175
August 2019 2800 200
Solution: Elasticity = 1.192
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄
𝐸=
𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃
where:
200 − 175
𝑄=
175
2800 − 2500
𝑃=
2500
0.143 𝑄
𝐸=
0.120 𝑃
Production and Cost
In the cyclical economic activity, household (HH) and firm (F) trade each other to further improve
production exchange. Production is the creation of goods and services to satisfy human wants
and needs. Production exchange include ownership on the part of the household like land, labor,
capital, entrepreneurship (LLCE). The latter firm to produce finished products or services
combines them and pays for it. Money as used for payments in all kinds became determinant
factor in the transaction details.
Production of goods and services involves transforming resources – land, labor, capital,
entrepreneurship (LLCE) – into finished products. The productive resources, such as labor,
capital, equipment, and land that firms use to manufacture goods and services are called factor
inputs and the amount of goods and services produced by the firm is called product output.
Factors of Production (L, L, C, E)
1. Land – the gift of nature
2. Labor – the exertion of human effort
2.1 manual or physical labor
2.2 mental or intellectual labor
3. Capital – it is finished product that is used to produce new product, e.g. machines and
equipment
4. Entrepreneurial ability – the overall organization of the factors of production
Investment – is the expenditure on new capital goods.
Determinants of Investments
1. Return of Investment (ROI) – refers to the corresponding amount (after sales) of the
products produced and offered for sale. The higher the sales and amount increase the
higher the return on investment.
2. Interest Rate – this s the amount of interest (percentage) as return for the use of capital
goods like money or machines as used in production operations. Interest rates are
likewise adjusted to inflation in order to determine profitability.
When to STOP production? The total cost of production (TC) and the total revenue (TR) are
determinants in the production of products offered for sale. Considering the interplay of
the two in the production and sales. The producers must see to it that the TR is higher
than the TC to promote stable production. The guides to production are stipulated below:
TR = TC, this means maintain production
TR < TC, this means stop production
TR > TC, this means continue production
Economic cost or otherwise known as the typical cost of production.
1. Fixed cost (FC)– cost that remains constant or is fixed
2. Variable cost (VC)– cost that varies according to volume of production
3. Total cost (TC) – the sum total cost of production ( fixed cost + variable cost = TC)
4. Marginal cost (MC) – the additional cost or extra cost brought about (change in TC/change
in Q)
5. Average cost – it is also called as unit cost (TC/Q)
6. Implicit cost – non-expenditure cost, it belongs to the owner of production
7. Explicit cost – it is the actual cost of production.
8. Sunk cost – this is known as unrecoverable cost.
9. Opportunity cost – is a foregone opportunity or alternative benefit.
10. Total Revenue - is the total goods sold, it the price times units sold
11. Profit – is the total revenue – total cost
Market Models
The combination of the productive factors by the firm creates sellers in a given market.
Their presence contribute to the foregoing class and form of products and services availability. It
is also a need to study them in order to react as to product pricing and came up with good buying
decisions.
Market is a place where there is transaction of goods and services. Every time there is
transaction regardless of what they are trading it is considered as market.
Market Structure or Models:
1. Monopoly – a market situation where there is only one seller of goods and services
2. Monopsony – a market situation where there is only one buyer of goods and services
3. Oligopoly – a market situation where there are only few sellers of goods and services
4. Oligopsony – a market situation where there are only few buyers of goods and services
5. Perfect competition – a market situation where there are many sellers offering identical
goods and services
6. Monopolistic competition – a market situation where there are many sellers offering
identical but differentiated of goods and services
Business organization
Business organization plays an important role in making products and services available.
Availability of goods and services are made known with the presence of business organization.
Forms of business organization
1. Single or sole proprietorship – where there is only one owner operating a business. This
business is governed by department of trade and industry (DTI)
2. Partnership – where there are two or more owners operating a business. It is an entity
governed by the security exchange commission (SEC).
3. Corporation – where there many owners operating a business. It is a legal entity governed
by the security exchange commission (SEC). This is composed of at least 10 members.
a. Bond – a certificate of indebtedness
b. Stock – a certificate of ownership
4. Cooperative – where there are many owners operating a business. This is governed by
the cooperative development authority (CDA). This is composed of at least 15 members.
a. Membership is voluntary
b. One member one vote policy
c. No member with more than 20% of the total assets
d. Division of net surplus and patronage refund among members
5. Franchise – where there is partnership between franchisee and franchisor agreed to help
each other in operating a business.
Application
Direction: Word Puzzle. Find and encircle the 10 words associated to the current lesson you read.
F R A N C H I S E S C A P E L Y O R T I
A U T O S 0 A L A I D O F F L I F E R N
T H P A N T A P X Y R B E 0 A R F T A V
H S H O P S D N A L A W P S B E E U N E
E T I T T C R I T O G O L R R Y R R Q S
R E P I I A I M I P N G A A O L Y N U T
S A C S P R E L E O O D Y M F F E I I M
D K A T E K R A M G O G R E A L I S L E
A S T A K E N V N I M P L I E D S T E N
Y A H C A P I T A L E E L F R E D O S T
A S S E S S T O C O R P O R A T I O N O
