FIRST QUARTER
MODULE 4- WEEK 5 and WEEK 6
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. What is the result of a roundabout production?
a. The use of fewer capital goods
b. Smaller markets
c. Greater production
d. Simultaneous increases in consumer goods production
2. What is the basic reason for the production of capital goods?
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
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d. Enhance future productive efficiency
3. Why is specialization in production economically beneficial
primarily?
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. What is 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. What is a firm’s economic profit?
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. What is the economic function of profits and losses?
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. What is the indication to 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
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c. Leave the industry, output will rise and product price will fall
d. Enter the industry, output will rise and product price will fall
9. What is the most efficient combination of resources in producing any
output?
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
11. A firm is producing 1000 units at a total cost of 5000 pesos. If it were
to increase production to 1001 units, its total cost would rise to
5, 008 pesos. What does this information tell you about the firm?
a. Marginal cost is 5 pesos and average variable cost is 8 pesos
b. Marginal cost is 8 pesos and average variable cost is 5 pesos
c. Marginal cost is 5 pesos and average total cost is 8 pesos
d. Marginal cost is 8 pesos and average total cost is 5 pesos
12. A firm is producing 20 units with an average total cost of 25 pesos
and marginal cost of 15 pesos. If it were to increase production to 21
units, which of the following must occur?
a. Marginal cost would decrease
b. Marginal cost would increase
c. Average total cost would decrease
d. Average total cost would increase
13. The government imposes a 1000 pesos per year license fee on all pizza
restaurants. Which cost curves shift as a result?
a. Average total cost and marginal cost
b. Average total cost and average fixed cost
c. Average variable cost and marginal cost
d. Average variable cost and average fixed cost
14. The demand curve for cookies is downward sloping. When the price of
cookies is 2 pesos, the quantity demanded is 100. If the price
rises to 3 pesos, what happens to consumer surplus?
a. It falls by less than 100 pesos
b. It falls by more than 100 pesos
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c. It rises by less than 100 pesos
d. It rises by more than 100 pesos
15. What is maximize if resources are allocated efficiently?
a. Consumer surplus
b. Producer surplus
c. Consumer surplus plus producer surplus
d. Consumer surplus minus producer surplus
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Lesson
PRODUCTION and COST
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 and cost.
2. Compare the price of commodities and analyze the impact to
consumers using production and cost.
3. Illustrate graphically the cost of production.
What’s In
Read the problem and answer it on a separate sheet of paper.
PROBLEM 1: 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.
PROBLEM 2: 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?
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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?
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?
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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.
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
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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.
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
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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
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
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:
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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, P K is the price of capital, PL is the price of
labor and TC is total cost
LCP = PL x L + PK x K
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.
Cost Concepts:
1. Total fixed costs – costs that do not depend on the quantity of output
produced.
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
10
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
A. 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.
15. An expenditure on a nonrefundable, nontransferable airline ticket is
an example of a sunk cost.
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B. 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.
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
___________________________________________________________________________
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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.
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.
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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
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. What is the law of diminishing marginal returns?
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
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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
Quantit 0 1 2 3 4 5 6
y
Total 24 33 41 48 54 61 69
cost
7. What is the total variable cost of producing 5 units?
a. 61 b. 48 c. 37 d. 24
8. What is the average total cost of producing 3 units of output?
a. 14 b. 12 c. 13.50 d. 16
9. What is the average fixed cost of producing 3 units of output?
a. 8 b. 7.40 c. 5.50 d. 6
10. What is the marginal cost of producing the sixth unit of output?
a. 24 b. 12 c. 16 d. 8
11. What is the profit maximizing of this firm?
a. 3 b. 4 c. 5
e. Cannot be determined from the information given
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
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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
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Answer Key
WHAT’S MORE
1. 7,12 2. 17, 16
14, 19 34, 35
24, 26 52, 34
30, 29 66, 43
36,38 76, 50
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References:
Arnold, Roger A. Principles of Economics. 11th edition. 2015
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]
Lopez-Mariano, Norma D. Business Mathematics. First edition. 2016.
Mankiw, Gregory N. Principles of Economics. 7th edition. 2015.
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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