Input 5

 INPUT 5.
Production and Costs
Under highly competitive conditions, a firm cannot control its cost for a particular
input since that cost is determined by supply and demand in the resource market.
Nevertheless, the firm can alter its cost per unit of output by adopting better production
techniques, using labor more efficiently, converting to different inputs, and spreading
fixed cost over a greater range of output. Since a firm's cost of production largely
determines the quantity of output it offers on the market, a further investigation of these
concepts are necessary.
I. The Production Function
A. Concept
The term production function refers to the physical relationship between a

firm's input of resources and its output of goods and services per unit of time,
leaving prices aside. It is a description of the amounts of output expected from
various combinations of inputs.
The production function depicts the output resulting from the production
process during a given unit of time. The inputs of resources used in production
are classified as either fixed or variable resources. It is a fixed resource if its
quantity is not varied during the production period. A resource is called
variable resource if its quantity is to be varied at the start or during the
production period. in the production of tree seedlings, for instance, the tools
used in the production process can be considered as fixed resource input while
the amount of fertilizer application and the numbers fall under the variable
resource inputs.
The fixed and variable resources are used to classify the length of the
production period as follows:
1. Very short run - time period so short that all resources are fixed.
2. Short run - time period of such length that at least one resource is
varied while other resources are fixed.
3. Long run - time period of such length that all resources can be varied.
B. Total Physical Product, average physical Product and marginal Physical

Product
1. Total physical Product - refers to the total output of the production

process. The total production output increased by increasing the amount of
variable input added to a bundle of fixed factors. In figure 10, the total
physical product is zero when input is zero. Output increase at an
increasing rate as the first few units of input are added. It continuous to
increase but at a decreasing rate at higher input levels until the output
eventually decrease with ha addition of more input.
Output/unit TPP
time
0
Input/unit time
Figure 10. The classical production function
2. Average Physical Product - measures the average rate at which an input is

transformed into a product. It is obtained by dividing the total amount of
the output by the total amount of the variable input. For exam, when 4
units of labor are used to produce 100 units of potted seedlings, the
average physical product is 25 units (100/4=25). Like the total physical
product, the average product increase, reaches a maximum and then
declines.
3. Marginal Physical Product - it is the change in output resulting from a unit

increment or unit change in variable input. It measures the amount that
totals output increase or decrease as input increases. It is computed by
dividing change in output by the causal amount of input; that is by the
increment or a change in input that caused the change in output. For
example, 130 units of output are produced with 10 units of input, but with
an additional unit of input making the total units of input 11, 140 units of
output are produced. MMP could then be computed as;
140-130
MMP = ————
11-10
10
MMP = ———— = 10
1
Therefore, between the input amounts of 10 and 11, an added unit of input
increases total output by 10 units.
C. The Law of Diminishing Returns
This law describes the relationship between output and a variable input
when other inputs are constant in amount. The law states that "if increasing
amount of one inputs are added to a production process while all other inputs
are held constant, the amount of output added per unit of variable input will
eventually decrease".
The law suggests that there is some right amount of variable input to use
in combination with the fixed input. If the increases in the variable resource
are carried far enough, total product will reach a maximum and may then
decrease. This is frequently the case with the application of fertilizer to
seedlings. Continuous increase in the amount of fertilizer added the seedlings
will eventually decreased the number of seedlings alive due to chemical
burning.
D. The Concept of Costs
Costs are the expenses incurred in organizing and carrying out the
production process. They include outlays of founds for inputs and services
used in production or all payments necessary to make factors of production
available. These payment can be: explicit - cost of resources hired or
purchased by the firms; Implicit - costs of self-owned or self-employed
resources; both. In the short run, total costs include fixed and variable costs.
In the long run, all costs are considered variable costs because all inputs are
variable. Costs of fixed inputs are called fixed costs and cost of variable
inputs are called variable costs.
E. Classification of Costs
1. Financial Costs - these are the monetary outlay on factors of production.

2. Opportunity Costs - these are the revenue or benefit forgone when a factor
production is withdrawn from an alternative course of action.
3. Shadow costs - net loss of social benefits incurred in applying a factor of
production to a particular course of action.
4. Direct Costs - costs incurred at the point of physical production like
wages, outlays for fertilizer and fuel costs.
5. Oncosts - mostly associated with employing labor like allowances for
holiday and sick days, costs that are not obvious at one point of physical
operation but must be paid if contented and efficient workforce is to be
retained.
6. Overhead Costs - enterprise costs which cannot be easily assigned to any
particular operation like undertaking research, maintaining information
service and exerting political influence.
NOTE: To determine how much you have learned from the lessons presented, try to
answer the Practice Task 5 in the next page. After answering all the questions,
compare your answers to the Feedback to Practice Task.
 Practice Task 5
1. Differentiate the following:
a. Explicit vs. Implicit
b. Average Physical Product vs. Marginal Physical Product
c. Production vs. Costs
2. Explain the law of Diminishing Return
3. Enumerate 3 example of fixed inputs.
NOTE: Compare your answers with the feedback section of the practice task.

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 INPUT 5.

Production and Costs

I. The Production Function

The term production function refers to the physical relationship between a

B. Total Physical Product, average physical Product and marginal Physical

1. Total physical Product - refers to the total output of the production

Figure 10. The classical production function

2. Average Physical Product - measures the average rate at which an input is

3. Marginal Physical Product - it is the change in output resulting from a unit

C. The Law of Diminishing Returns

D. The Concept of Costs

1. Financial Costs - these are the monetary outlay on factors of production.

1. Differentiate the following:

a. Explicit vs. Implicit

b. Average Physical Product vs. Marginal Physical Product

c. Production vs. Costs

2. Explain the law of Diminishing Return

3. Enumerate 3 example of fixed inputs.

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