LESSON II

Managing Production

Objective: To appreciate the role of production in economics.

Unit Objectives: 1. To define production as economic activity.

2. To understand production and its significance to the human life.

3. To know how production operates in the economy.

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• What are the things we use in our daily lives and from where are they come from?

• What do your think will be our feelings if we do not posses those things we can not be found around?

• How do you find the produced goods as part of our daily lives?

❑ How can we describe production?

❑ How is production be defined? Google Images

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 • There are things we use and we need in our lives that are not readily and directly
provided to us by nature. Thus, production takes place.
• Production is a process of transforming goods (resources) to become another goods.
Here we • Because of human insatiability, human beings undertake production.

GO… ➢ Not all those that human beings want are available from nature.

• By production, human wants and needs are satisfied, though they remain insatiable.

➢ Production is done by the people themselves who are having their needs and wants.

• Production will only be possible if resources are available. Thus, resources are also called Factors of Production.

➢ Land refers to natural resources used in production. They include what we find in the surface of earth, over and under it.

➢ Labor is the human resources or manpower to undertake the production process. It includes the physical and mental human contribution

✓ Direct Labor are those having a direct contact in the production process.

✓ Indirect Labor are those whose without the direct contact in the process of production.
➢ Capital refers to man-made goods used to produce another goods. They are into two (2) kinds:

✓ Real Capital pertains to machines, tools, equipment and other man-made goods used in production, except
money. Examples are delivery car, building, hammer, cooking equipment, etc.

✓ Financial Capital refers to money used in doing the production, like payments on labor, utilities particularly water and electricity, raw materials, etc.

➢ Entrepreneurs are those who initiate and manage the production, and they complete the process by bringing the products close and available to the
people, including the business owner, managers and supervisors, the vendor, resellers, etc.

Images courtesy of Google Images 12

• Resources are the people themselves, and/or they are either the owner or stewards of them. As they allow resources to be used for production, they receive
something from it as counterpart that normally comes in the form of money. Thus, money incomes come.
➢ Wages/Salary are money incomes received from labor.

➢ Profits, including commissions, are also money incomes acquired from land resources and entrepreneurship.

➢ Interest as money income is derived from the lending of money.

➢ Rent is another income in the form of money achieved from other’s use of real capital.

• As economics is about proper and efficient use of resources, fundamental economic questions are necessarily be answered.

➢ What to produce is about the goods and services to produce.

➢ How to produce pertains to the process, strategies, tools, machines, and equipment needed.

➢ For whom to produce is refers to the consumers to whom the production is intended.

➢ How much to produce answers the quantity of the products to be produced.

• A way to undertake production is also based on the Economic Systems adopted by the society.

➢ Command economy is a dictated economy with the government or other powerful economic institutions giving the command
with regards to production and consumption.
➢ Market economy is an economy characterized by freedom of both producers and consumers in making their economic decisions

➢ Traditional economy is a system that economic decisions are guided by old practices, cultural upbringing, religious practices, and
other sociological elements.
➢ Mixed economy is an economy where we find the mixture of all other economic systems.
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• The production theory deals with the relationship between the factors of production or inputs and outputs of goods and services.
➢ Variable inputs are the resources that change affecting the outputs to change. Labor, machines, and input materials (raw materials) for instance if they are
necessarily be increased to produce more the production, otherwise, labor is a fixed inputs. This happens in the short-run period of production.
➢ Fixed inputs are the resources that remains the same even in the changes of outputs. This happens, for instance, if the labor, machines, other capitals are
unchanged even in the changes of the products produced. This happens in the long-period of production.
➢ Variable costs are the expenses that are changing to change the number of products to produce. This also occurs in the short-run period of production.

➢ Fixed costs are the expenses that are not changing even the number of products produced are changing. This happens when the production period is in a
long-run.
• The circular flow of the economy shows us the relationship between the economic sectors to make us understand how firms/businesses are important to the
economy and how it operates in economic system. Figure 1 shows the illustration of the Circular Flow of the Economy involving households and firms.

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 • Because everyone is having their various needs and wants, that many of them are not
readily available from the surroundings provided by nature, some of the individuals
choose to undertake production. Among themselves, they form the firms/business
sector from whom the supply of goods and services come from.

• Firms provide the supply of goods (1) in what is called the Goods market where
consumers come to buy goods and services.

➢ Market is known as the situation or place where buying and selling of goods happens.

• Through the households’ Demand for goods (2), the goods from the Goods market go to
the households.

• For the firms to be able to produce their goods, labor is needed by the firms that the
households provide – the Labor supply (3) we find in the Labor market.
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• In exchange of labor from the households, firms are giving them the Wages/salaries (5).
• The Labor market provides the Labor demand (4) of the firms.
• Parts of Wages, salaries by the Households that they were not used as Expenditures on
• In purchasing goods from the firms, households are paying them to
goods and services becomes their Savings (7) they placed in the Money market.
become their Expenditure on goods and services (6).
• Parts of Households’ Wages, salaries are paid to the Government in the form of Taxes
• Through the Money market, Households’ Savings become
(9) that, in turn, Government return them in the form of Transfer payments (10).
available to the Firms through borrowings to form as their starting
• From the taxes received, governments also help Firms through Grants, subsidies (11).
or additional Investment (8).
• Firms also support the government by paying them their Corporation tax.
• Transfer payments are goods and services paid by the government to be
• As those economic activities flowing from the economic sectors of Firms, Households,
distributed to Households in the forms of benefits, social security, projects
and Government create the circular movement of economic activities, we call them
and programs, and other government initiatives beneficial to its
as the Circular Flow of the Economy.
constituents. 15
Money as a Medium of Exchange
• The Barter System
➢ It is a system of direct exchange of goods and services.

• Disadvantage of the Barter System

1. Slowing down of trade.

2. Lacking of double coincidence of wants

3. Lacking of proper way to equate the value of things being exchanged

4. Indivisibility of goods
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• Money
➢ Anything used by the society as a medium of exchange and widely accepted for the payment of goods and services without questioning the integrity
of the person who offers it.
• Functions of Money

1. Medium of exchange

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2. Standard of value Google Images Google Images

3. Store of value

Google Images 4. As a means of deferred payment

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• Characteristics of Money
• Monetary Standard
1. Utility ➢ The currency system adopted by a country to provide a stable
2. General Acceptability medium of exchange.
3. Portability • Types of Monetary Standard
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4. Uniformity or homogeneity 1. Commodity Standard

5. Malleability ➢ A monetary system in which the purchasing power or

value of monetary unit is equal to the value of designated
6. Divisibility
quantity of a particular commodity or set of commodities.
7. Cognizability
2. Fiat Standard
8. Durability
➢ A monetary system in which the face value of the
9. Elasticity of Supply monetary unit is very much higher than that of the value.
10. Stability of Value

• Money Multiplier
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➢ It is the capacity of money to increase its own supply.

• Effects of Multiplier
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1. Increase in output 2. Increase of employment 3. Increase in interest rates 4. Inflation

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Trade-off and Opportunity Cost
• Every economic decision involves trade-off and opportunity cost.

➢ Trade-off refers to a situation in which the decision

involves diminishing or losing one quality, quantity or
property in favor of the return for gains in other
aspects.

▪ E.g. is the giving off the purchase of car in

favor of house and lot; deciding not to buy
softdrinks for pieces of bread. Google Images

➢ Simply refers to sacrifice made in taking a choice, opportunity cost is incurred when the
benefits of other alternatives are not enjoyed.

▪ Using the examples above in trade-off, the opportunity cost is the happiness enjoyed
from the car and the satisfaction to be achieved from softdrinks.

Production Possibility Frontier (PPF)

• PPF is an illustrating showing the curve of varying amounts on two products that can be produced from a given available resources.

• It shows that production of one commodity may increase/decrease if the production of the other product increases/decreases.

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 Alt Pants Shoes

A 0 10

B 2 8

C 4 6

D 6 4
H

E 8 2

F 10 0

• Points A, B, C, D, E
& F are line of
production Image by Sabrina Jiang @ investopedia 2020

efficiency as the • PPF is in fact, not a downward sloping straight

• Point H is attainable yet inefficient possibility
available line but a bending line as appears above..
because there shall be excess resources.
resources are fully
➢ This is governed by the Law of Diminishing
utilized.
Returns.
• Point G is unattainable and inefficient possibility ➢ Law of Diminishing Returns states that as a
because it requires more resources. resource increases while other resources are the
same, the output decreases.

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 PPF2
PPF1 PPF2 PPF1

• What are the consequences if the fundamental economic questions are not properly answered? Explain.

• Among the factors of production, which of them is the most important? Discuss.

• What do you think is the economic system prevailing the Philippine economy. Elaborate.

• How will you explain the circular flow of the economy?

• Try to relate PPF in your ordinary life.

Watch out 21

For quiz #2