Production & Cost (Chapter 3)

        PRODUCTION AND COST

Definition of production process of using the factors of production to produce goods or services Transformation of input into output (physical goods)

TIME PERIOD OF PRODUCTION

SHORT-TERM PERIOD At least one fixed input Eg: building, equipment , tools

LONG-TERM PERIOD All input are variable Variable input which the quantity changes according to output Eg: raw materials, transportation, communication

                                          TYPES OF PRODUCTION

PRIMARY First stage on production process eg: agricultural, fishing

SECONDARY Manufacturing the finished goods from raw materials. Eg: motorcar industries, consumer goods

TERTIARY Do not produce goods but provide services. Divided by two. Commercial services (physical goods) Direct services (teacher, police)

ELASTICITY

WHAT IS ELASTICITY?

Elasticity is a measure of the responsiveness of a variable(quantity demanded or supply) to a change in one of its determinants.

HOW MANY TYPES OF ELASTICITY?

1. Price elasticity of demand
2. Income elasticity of demand
3. Cross elasticity of demand
4. Price elasticity of supply

PRICE ELASTICITY DEMAND

Measures the responsiveness of the quantity demanded due to the change in its price.

DEGREE OF PRICE ELASTICITY OF DEMAND

(1)FAIRLY ELASTIC DEMAND

Small percentage change in the price of a product will lead to a larger percentage in

the quantity demanded.The price elasticity of demand is more than 1.

(2)FAIRLY INELASTIC DEMAND

Large percentage change in the price will not affect the quantity demand by a small

percentage.The price elasticity of demand is less than 1.

(3)UNITARY ELASTIC DEMAND

Percentage change in price equals to a change in quantity demanded.Price of

elasticity demanded is equal to 1.

(4)PERFECTLY INELASTIC DEMAND

The quantity demand does not change as the price change.Price of elasticity demanded

is equal to 0.

(5)PERFECTLY ELASTIC DEMAND

The quantity demand changes infinite as price change.Price of elasticity demanded

is infinity.

INCOME ELASTICITY OF DEMAND

Measure the responsiveness of changes in the quantity demand for a product due to a change in income.

VALUE OF ELASTICITY	TYPES OF GOODS	EXAMPLES OF GOODS
More than 1	Luxuries-As the income increase ,the quantity demand for a product increases & vice versa.	Antique furniture,gold & jewelleries.
Less than 0	Giffen/inferior-The quantity demand for a product decreases as income increases.	Used cars & salted fish
More than 0 but less than 1	Necessity/normal-The quantity demanded for product does not change even though income increases.	Rice & vegetables

CROSS-PRICE ELASTICITY OF DEMAND

The degree of responsiveness of quantity demanded of goods A to change in price of goods B.

VALUE OF ELASTICITY	RELATIONSHIP OF GOODS
More than 0 (positive)	Substitutes
Less than 0 (negative)	Complementary
Equals to 0	Independence

Market Equilibrium

MARKET EQUILIBRIUM

• How market price and market quantity are determined.

DEFINITION OF MARKET EQUILIBRIUM

• When quantity demanded and quantity supplied are equal.

 Quantity Demanded (Qd) = Quantity Supply (Qs)

 

SHORTAGE When the price was set up below than equilibrium price ( Quantity demanded is greater that quantity supplied )

SURPLUS The price was set up above than equilibrium price (Quantity supplied is greater than the quality demanded)

MAXIMUM PRICE OR CEILING PRICE

• Government imposed regulations that prevent prices from rising above a maximum level set by the government which can lead to shortage

MINIMUM PRICE OR FLOOR PRICE

• Government imposed regulations that prevent price from falling below a minimum level set by the government which can lead to surplus.

SUPPLY

SUPPLY

  

Definition Of Supply - Ability and willingness to sell        goods or services.

Law Of Supply- Positive relationship between price and quantity
 

PRICE(P) = INCREASE    QUANTITY (Qs)=     INCREASE

SUBSTITUTE GOODS Supply of product will decrease if the price of substitute product increase

COMPLEMENTARY GOODS If Price increase then the supply of complementary product increase

COST OF PRODUCTION Price of production increase, quantity supplied will decrease and vice versa

EXPECTED FUTURE PRICE If the price expecting increase, the quantity supplied now will decrease then the supply will shift to left

TECHNOLOGICAL ADVANCE Most important influences on supply existence of the new technology will reduce cost of production

NUMBER OF SELLERS The large number of firms supplying a product, the large quantity supplied of product and vice versa.

Demand (Part 2)

DETERMINANT OF DEMAND

PRICE OF RELATED GOODS Affected by a change in the price of related goods which have 2 categories.	SUBSTITUTE GOODS-Goods/services that can be used in place another product/service. COMPLEMENTARY GOODS-Goods that are used in conjunction with another product.
CONSUMER'S INCOME	-Income increase,consumer's demand for goods and services increases. -Goods increases in demand as income increases are normal goods - Goods decreases in demand as income increases as inferior goods
TASTE AND FASHIONS	- change significantly - if a product becomes fashionable, demand will increase and if the same product becomes outdated, demand will fall - tastes and fashions change demand will also changed
POPULATION	- demands depend on the size of the total population in the market
FESTIVE SEASONS & CLIMATIC CONDITION	Different product will be high demand
PRICE EXPECTED	If price are going rise for the next day, people are likely to buy more before the price are does go up

Demand (Part 1)

HOW MARKETS WORK?

DEMAND

DEFINITION	Ability and willingness to buy.
LAW	Negative relationship between price of product and quantity of demanded.
INDIVIDUAL & MARKET DEMAND	Market demand is the combination of individual demands. PERSON 1 + PERSON 2 = MARKET                                                                               DEMAND

Economic System

ECONOMIC SYSTEMS

	FREE MARKET ECONOMY	COMMAND ECONOMY	MIXED ECONOMY
DEFINITION	Operation without government intervention	Fully controlled by government	Mixture of private and government control
CHARACTERISTICS	-decision by individual -used price mechanism	-decision by government -controlled the gap	-use market mechanism -individual and firm free to have properties
ADVANTAGES	-free to make own economic choice -free to choose where to work	-can avoid unemployment -same income distribution	-try to reduce gap between rich and poor -government control the existence of monopolies
DISADVANTAGES	-wide gap between rich and poor -unemployment problem	-mistake decide in economy -technology are undeveloped	-freedom is not totally offered for enterprise

Production possibilities curve (PPC)

DEFINIITION of PPC:
MAXIMUM combination on goods that can be produced given the available FOP and the available TOP(Technology of Production)

Purpose
-understand the concept of scarcity & constrained choice
-emphasize distinction between movements along a PPC & shifts the PPC
-show concept of opportunity cost using PPC model

3 Assumptions
-two goods will be produced
-technology unchange
-full employment

Attainable & Unattainable combination

1) Attainable & efficient combination
   -best possible combination
   -fully utilized
   -full employment level
   -firm is efficient
2)Attainable but not efficient
   -it can be produced
   -but economy not efficient
   -not fully utilized resources(unemployment exist)
3)Not attainable
   -not attainable as it is outside PPC
   -not enough resources
   -no new technology
4)Extreme combination
   -all resources only produce one goods

Change in PPC
 a) Increasing in population




 
 -Manufacturers will increase the volume of goods when there is an increase in population
 -Production of both goods will increase
 -Causes PPC to shift to right

 b) Technology progress

 -Technology progress only happened in producing ovens
 -Economy will produce more ovens compare tortillas
 -PPC shifted outwards horizontal axis

Factor of Production (FOP)

Bismillahirahmanirahim.

There are FOUR FACTORS of production that used in production process order to produce economic goods and services.


LAND-It is free gift of natures and the value based on quality and location. The most important, it is a major of resources .

 

 

 LABOUR-The services contributed by human that involved mental and physical process include the skill and unskillful.

CAPITAL-Human made resources to produce other  goods and services. The return to the capital is interest

ENTREPRENEURSHIP-Those who are can manage their firm to produce the goods and services. They are also willing to take risks and organize the other factors production

Economics Issues

INTRODUCTION : ECONOMICS ISSUES

 

DEFINITION OF ECONOMICS

Field of social science that studies the behaviour of individuals and society in the distribution and allocation of limited factors of production

 DIFFERENCES BETWEEN MICROECONOMICS & MACROECONOMICS

 

MICROECONOMICS	MACROECONOMICS
Study of small economic units	About the whole of economy issue in the country
Demand and supply in individual markets	Monetry/fiscal policy
Individual consumer behaviour	Reasons for inflation and unemployment
Individual labour markets-Demand for labour and wages	Economic growth and government borrowing

 POSITIVE VERSUS NORMATIVE ECONOMICS STATEMENT

POSITIVE ECONOMY STATEMENT	NORMATIVE ECONOMY STATEMENT
Based on facts and not value judgement.It also can be tested and verified.	Based on value judgement and on personal opinion.It cannot be tested.
Example;Government provided healthcare increases public expenditure.	Example;Government should provide basic healthcare to all citizens.

BASIC ECONOMICS CONCEPTS
SCARCITY	Lack of resources to produce unlimited demand
CHOICE	Decision that must be make by the firm to produce all product at the same time
OPPORTUNITY COST	Second class thing which is the second class thing will be forgone to get the best alternative

EXAMPLES DUE TO THE BASIC ECONOMIC CONCEPTS

Aza has RM5 and she would like to buy 2 things : a book and a pen which cost RM5 each (unlimited wants and limited sources).Aza has to choose either to purchase a book or a pen which would satisfy her needs(choices).If Aza chooses the book,then the pen is the opportunity cost because it is the second best alternative which she has to forgone.

BASIC ECONOMICS PROBLEMS
WHAT to produces	-Concerned with goods and services will be produces. -Firms will produces goods based on demand of the goods and the goods must give maximum utility.
HOW much to produces	-Decide how many quantity of the product should be produces. -Must based on total demand for the goods.
HOW to produces	-How the goods will be produced for the firm to make the decision.
For WHOM to produces	-The target market to sell the product. -Goods are distributing base on income of people.