Econ Final- Production Function PDF

**PRODUCTION FUNCTIONoduction Function** \- the economic process of **converting the inputs into** **outputs** \- explains the manner by which a business firm decides how much to produce each commodity (products/services) that it sells \- the firm determines **how much of each king of *labor,...

**PRODUCTION FUNCTIONoduction Function** \- the economic process of **converting the inputs into** **outputs** \- explains the manner by which a business firm decides how much to produce each commodity (products/services) that it sells \- the firm determines **how much of each king of *labor, raw materials, fixed capital good, etc.,*** it will use (inputs or factors of production) \- dictates how businesses decide the quantities of outputs to produce in response to demand \- concerned with productive activities of a business, namely: 1\. the decisions about **methods of producing** a given quantity of the output in a plant of given size and equipment and is concerned with **short-run cost** **minimization** 2\. the **determination of the most profitable quantities** if products to produce in any given plant and is after the **short-run profit maximization** 3\. the **determination of the most profitable size and** **equipment of plant** and relates to **long-run profit** **maximization** **SHORT RUN COST MINIMIZATION** \- choose quantities of the **variable inputs** so as to minimize total cost \- under the constraint that the quantities of some factors are fixed (*i.e. cannot be changed*) **variable inputs** are those inputs of production that a firm can ***use as per its requirement and make changes in*** ***it easily***. For example, *raw materials of production, labor, capital, etc*. **SHORT RUN PROFIT MAXIMIZATION** \- occurs at the point where **marginal revenue equals** **marginal costs** for as long as the competitive marketplace allows a positive profit, and before the perfect competition has reduced prices **marginal revenue** is the ***net revenue a business earns by selling an additional unit of its product***. The marginal revenue is the change in revenue divide by the change in quantity - If MR exceeds MC, then the producer will continue producing as it will add to his profits. **LONG RUN PROFIT MAXIMIZATION** \- process by which firms **aim to achieve the highest** **possible profit over an extended period**, considering all costs and revenues while making strategic decisions about production and market positioning. \- this concept emphasizes that firms can adjust all inputs in the long run \- firms often invest in technology and innovation in the long run to reduce production costs and improve efficiency \- long-run adjustments may include **changing factors** such as ***labor, capital, and technology*** to respond to shifts in demand or input prices. \- firms that successfully maximize profits in the long run often create sustainable competitive advantages that help them maintain market share **LAW OF DIMINISHING MARGINAL RETURN** \- called as **law of diminishing returns**, the **principle of** **diminishing marginal productivity**, and the **law of** **variable proportions** \- states that after some optimal level of capacity is reached, adding an additional factor of production will actually result in smaller increases in output \- this law affirms that the addition of a larger amount of one factor of production, ceteris paribus, inevitably yield decreased per-unit incremental returns **THREE STAGES OF PRODUCTION** 1\. The first stage is the increasing returns stage. 2\. The second stage is the diminishing returns stage. 3\. The third stage is the negative returns stage. 1\. **Increasing returns stage**. During this stage. The producer experiences an increase in output as they add more units of input. 2\. **Diminishing returns stage**. During this stage, the producer experiences a decrease in output as they add more units of input. 3\. **Negative returns stage**. During this stage, the producer experiences a further decrease in output as they add mor units of input. Understanding these stages is **essential for producers to** **optimize their production process** **TOTAL VARIABLE COST** \- cost of all **variable inputs** **TOTAL FIXED COST** **-** cost of all **fixed inputs** **TOTAL COST** **- sum** of **TVC and TFC** **AVERAGE VARIABLE COST** **-** variable cost per product, or total variable cost divided by output **AVERAGE FIXED COST** **-** fixed cost per product, or total fixed cost divided by output **AVERAGE TOTAL COST** **-** cost per product, or total cost divided by output **MARGINAL COST** **-** per product cost of producing an additional unit of the product, or the change in total cost divided by the change in output The **concentration ratio** compares the size of firms in relation to their industry as a whole. **Low concentration** ratio indicates greater competition in an industry, compared to one with a ratio nearing 100%, which would be a monopoly **Pure Competition** \- a market structure in which there are many competing firms selling identical products or services. \- very few, if any, industries in the real world are purely competitive, because it is believed that each company is unique and has at least a very small amount of monopoly power. **PERFECTLY COMPETETIVE MARKET** \- is a **hypothetical extreme** because of the ff assumptions: there are a large number of buyers and **sellers selling homogeneous products**. This indicates that all the products are perfect substitutes for each other. Products are "identical" (*hardly recognizable from one another*) all the sellers sell the product at a uniform price. (*sellers* *are price takers*) ***Conditions in a perfect competition:*** \(1) many firms produce identical products; \(2) many buyers are available to buy the product, and many sellers are available to sell the product; \(3) sellers and buyers have all the relevant information to make rational decisions about the product that they are buying and selling; and \(4) firms can enter and leave the market without any restrictions---in other words, there is free entry and exit into and out of the market. \- perfectly competitive firm is a price taker, because the pressure of competing firms forces it to accept the prevailing equilibrium price in the market. ▪ Raising the price of its product even by a small amount will make it lose all of its sales to competitors. ▪ Supply and demand in the entire market solely determine the market price, not the individual farmer. \- Firms are likely to be price takers if the market has some or all of the following ***Properties:*** **1. Huge number of firms**  If there are enough sellers, no firm can raise or lower the market price.  An individual firm is a tiny percent of the entire market.  The firm's demand curve is a horizontal line at the market price. **2. Homogenous products**  In the eyes of the buyers products are identical.  Thus, the buyers find no reason to prefer the product of one seller to the product of another. **3. Everybody knows everything** **4. Low transaction costs**  There is a large number of buyers and sellers and where homogeneous product is sold at a uniform price. **5. Free entry and exit**  There are no barriers to entry or exit in a perfect competition. \- Obviously these conditions are never fully met, but many markets are highly competitive. **MONOPOLY** - an industry **with only one seller** \- product that the firm sells has no close substitutes. Monopolies can be firms that are granted exclusive production rights by a government. **Examples**: Public utilities \- The monopolist is a **PRICE MAKER**. \- Monopolistic markets exist when one company is the dominant provider of a good or service. \- Limited competition and high barriers to entry enable the monopoly in this market to set the price and supply of a good or service. \- Monopolistic markets are controversial because they can lead to price-gouging and deteriorating quality due to a lack of alternative choices. \- Regulators may intervene to prevent monopolistic markets from existing if they believe such a market is detrimental to the general public. \- A **natural monopoly** is a type of monopoly that *occurs in* *an industry that has extremely high fixed costs of* *distribution*. \- **Example**. Suppliers of utilities How the Phil. Government regulate monopolists ▪ Republic Act No. 3247, December 01, 1925 **AN ACT TO PROHIBIT MONOPOLIES AND COMBINATIONS IN RESTRAINT OF TRADE.** ▪ The **Philippine Competition Act (PCA) or R.A. 10667** is the primary competition law of the Philippines for promoting fair competition in the marketplace and protecting well-being of consumers in the process. The PCA was pas **MONOPOLISTIC** \- competition is a market structure in which there are many small firms selling slightly differentiated products or services. \- monopolistic competition is different from monopoly. \- **Examples:** Restaurants, toothpaste companies, soap makers, and milk producers **4.** **OLIGOPOLY Oligopoly** \- a small number of firms is responsible for the majority of the sales \- because firms in this industry are usually big, actions of one firm (*for example, a price cut or an aggressive advertising campaign*) significantly affect actions of rival firms. \- sometimes oligopoly firms collude (work together) in order to make larger profits. \- **Examples**: Airline companies, Oil companies **CARTELS** \- a **collection of independent businesses** or organizations that collude to manipulate the price of a product or service. \- cartels are competitors in the same industry and seek to reduce that competition by controlling pricing in agreement with one another. \- tactics used by cartels include reduction of supply, price fixing, collusive bidding, and market carving. \- In the majority of regions, cartels are considered illegal and promoters of anti-competitive practices. \- The actions of cartels hurt consumers through increased prices and lack of transparency. ***1-2. Cite 2 differences between international and domestic trade/business.*** 1\. Nationality of Buyers and Sellers 2\. Nationality of other Stakeholders 3\. Mobility of Factor of Production 4\. Customer Heterogeneity Across Markets 5\. Difference in Business Systems and Practices 6\. Political System 7\. Business Regulations and Policies 8\. Currency Used in Business Transactions ***5-6. Benefits of IT to nations.*** 1\. Earning of Foreign Exchange: 2\. More Efficient Use of Resources: 3\. Improving Growth Prospects and Employment Potentials: 4\. Increased Standard of Living: ***7-8. Benefits of IT to firms.*** 1\. Prospects for Higher Profits: International business gives scope to firms a whole new market to target. 2\. Increased Capacity Utilization: 3\. Prospects for Growth: 4\. Way Out to Intense Competition in Domestic Market 5\. Improved Business Visions: ***9-10. Reasons for the conduct of stake holder analysis.*** 1.To enlist the help of key organizational players. 2.To gain early alignment among all stakeholders on goals and plans. 3.To help address conflicts or issues early on. **MONOPSONY** \- a market situation in which there is **only one buyer** **OLIGOPSONY** **-** a state of the market in which only **a small number of** **buyer exists for a product** **- Example:** McDonalds, Burger King, and Wendy's buys a huge amount of the meat produced by American ranchers. ***That gives the industry the ability to dictate the price they are willing to pay*** **Profit** = Total Revenue -- Total Cost **Total Revenue** = Price/Unit x Quantity Sold **Total Cost** = Variable Cost + Fixed Cost A firm's revenue depends on the demand for the firm's product. **EXPLICIT COST** **- out-of-pocket costs, or payments** that are actually made by the firm \- **Example:** wages, rent **IMPLICIT COST** \- the opportunity cost of **using resources already owned** **by the firm** \- **Example:** working in the business while not getting a formal salary, or using the ground floor of a home as a retail store \- also include the depreciation of goods, materials, and equipment that are necessary for a company to operate **ACCOUNTING PROFIT** \- ***cash concept*** \- total revenue minus explicit costs \- the difference between money brought in and money paid Out **ECONOMIC PROFIT** -total revenue minus total cost \- including both explicit and implicit costs. \- determines the success/failure of the firm **MARKET STRUCTURE** **-** Involves the classification of markets according to the degree and nature of competition for products and services. \- describes how firms differentiate their products. \- A market structure helps us to understand what differentiates markets from one another. **The four types of Market Structures:** 1. perfect competition, 2. monopolistic competition, 3. oligopolistic competition 4. monopolistic markets (monopoly) To the first four types 5\. Monopsonies 6\. Oligopsonies Except for PERFECT COMPETITION, all these 5, make up the IMPERFECT MARKETS. **IMPERFECT MARKET** **-** an economic market that does not meet the rigorous standards of a hyphothetical perfectively competetive market.. **IMPERFECT MARKETS** \- are characterized by having competition for: 1. market share, 2. high barriers to entry and exit, 3. differentiated products and services, 4. and a small number of buyers and sellers. Exact opposite of perfect competition. \- A **perfectly competitive firm** is a price taker, because the pressure of competing firms forces it to accept the prevailing equilibrium price in the market. \- Raising the price of its product even by a small amount will make it lose all of its sales to competitors. \- Supply and demand in the entire market solely determine the market price, not the individual farmer. Firms are likely to be price takers if the market has some or all of the following Properties: 1\. Huge number of firms 2\. Homogenous products 3\. Everybody knows everything 4\. Low transaction costs 5\. Free entry and exit Obviously these conditions are never fully met, but many markets are highly competitive. Firms are likely to be price takers if the market has some or all of the following Properties: 1\. Huge number of firms \- If there are enough sellers, no firm can raise or lower the market price. \- An individual firm is a tiny percent of the entire market. \- The firm's demand curve is a horizontal line at the market price. Demand is perfectly elastic. Firms are likely to be price takers if the markets have... 2\. Homogenous products \- In the eyes of the buyers products are identical. Thus, the buyers find no reason to prefer the product of one seller to the product of another. Firms are likely to be price takers if... 3\. Everybody knows everything 4\. Low transaction costs \- there is a large number of buyers and sellers and where homogeneous product is sold at a uniform price. 5\. Free entry and exit \- There are no barriers to entry or exit in a perfect competition. Obviously these conditions are never fully met, but many markets are highly competitive. \- **Monopolistic competition** is a market structure in which there are many small firms selling (slightly) differentiated products or services. \- Sellers compete among themselves and can differentiate their goods in terms of quality and branding to look different. Sellers are always on the look out of the prices of their competitors. **Monopoly**. An industry with only one seller. The product that the firm sells has no close substitutes. **Monopolies** can be firms that are granted exclusive production rights by a government. Examples: Public utilities The monopolist is a PRICE MAKER. **Monopolistic markets** exist when one company is the dominant provider of a good or service. **Limited competition** and high barriers to entry enable the monopoly in this market to set the price and supply of a good or service. Regulators may intervene to prevent monopolistic markets from existing if they believe such a market is detrimental to the general public. **TYPES OF MONOPOLIES:** 1. **Natural monopoly.** A single firm produces the entire market output at a lower cost due to economies of scale. Examples include public utilities such as electricity and water supply. 2. **Geographic monopoly,** where a single firm controls the market within a specific geographic region due to the lack of competition or economic viability for other firms. Examples include small-town grocery stores or remote gas stations. 3. **Technological monopoly**, which arises when a firm controls a specific production process or technology that others cannot replicate or access, often due to patents and intellectual property rights. An example is a pharmaceutical company holding a drug patent. 4. **Legal monopoly**, where the government grants exclusive rights to a single firm through licenses, patents, or regulations. This is done to encourage innovation and protect public interests. Examples include the postal service and public transportation services. **MONOPSONY** **-** Domoniated by a single buyer \- The buyer is called a monopsonist. \- A monopsony can arise due to geographical constraints, government regulation, or unique consumer demands. \- The monopsonist generally has a controlling advantage that drives its consumption price levels down. \- Monopsonies commonly experience low prices from wholesalers. **-** In a **monopoly** where there is ONLY ONE SELLER, that ONE SELLER can bring the price UP,(upward pricing pressure) in a **monopsony** where there is ONLY ONE BUYER, that one buyer can cause a PRICE CUT (downward pricing pressure.) **OLIGOPSONY** **-** Few powerful buyers and large number of sellers \- Because of a LARGE NUMBER OF SELLERS but a FEW BUYERS, sellers have little negotiation power and compete to sell their goods and services to a handful of buyers. It gives the buyers more control over the price of the former's products. \- in OLIGOPSONY, buyers are in an advantageous position over the sellers. **BUYERS can manipulate sellers:** 1. to obtain goods at low prices and earn surplus profits. 2. Dictate Quality of products 3. Dictate Specifications of goods and services 4. Demand Product varieties 5. Demand Quantity of products 6. Delivery schedule of products 7. Payment mode and schedule