deals with the study of microeconomics and macroeconomics its principle, concepts and functions within the economy and in the agricultural sector. It helps farmers and consumers to identify the proper needs and wants to satisfy the basic necessities of life.

1. BASIC ECONOMICS CONCEPT
AGRIBUSINESS MANAGEMENT

2. Economics- is a study of proper allocation and utilization of scarce resources to satisfy the unlimited human
wants and needs.
• Consumer – efficient use of resources & satisfy the needs, wants and desire. (consumption)
• Producer – efficient use of resources (minimize cost) & maximize profit ( satisfaction)
Producer Side ( farmers/ businessman/ entrepreneur- micro) (Philippine economy-macro_
Activities:
1. Production
2. Marketing
3. Forecasting
Basic Economic problems
1. What to produce?
2. How much to produce?
3. Where to produce?
4. When to produce?
5. How to produce?
face w/ economic
problems

3. Factors of production:
“There is no such thing as free lunch” except??
1. Land- sources of all materials & food in or above the earth.
“rent”- form of payments
2. Labor- human effort: physical & mental
“wages”- form of payment
3. Capital- “caput”- Latin word means “head”, all tangible & physical good that creates expectation to improve
or increase production. “inputs”
“interest”- form of payment
Capital formation- process of creating capital (investment)
Note: we are not talking about money
Ex. Group of fishermen (labor factor) takes time to make a boat. ( creating capital)
-in the hope of increase o additional catch; increase/additional catch represents ROI
Human capital- investing oneself by training or educating to be more productive (creating human capital)

4. 4. Entrepreneurship- comes from the French word “ entreprendre”- to under take
managing the 3 factors of production to create goods & services to produce.
“ profit”- form of payment
Serve as supervisor, manager/owner of the business mostly prone to bankruptcy/ risk of loss.
MONEY IS A RESOURCE OR FACTOR OF PRODUCTION???
- Money is not a factor of production but enables to attract/ buy the 4 factors of production
- Money means of acquiring wealth & a way of measuring wealth
WHY????
It is just consider as the “lubricant” or the means (facilitate) of trading to acquire capital of production.
When was the last time you saw a farmer put some money on plant to be productive? Instead, farmers need to
buy fertilizers.
The worth of money is because of “tinkerbell effect”- the more you believe in something, the more you believe its
reality.

5. The Economic System- classification of societies
- In order to answer the basic economic question, lets have an understanding on economic system that have
significant role in solving the said problems.
Economic system- a set of economic institutions that dominate a given economy with the main objective of
solving basic economic problems.
Institutions- established organization ( government, business/firms, consumers and etc.)
Categories of economic system:
1. Traditional economic system- economic decisions are made with great influence from the past.
copying/ duplicating decision made from the past generations.
Characteristics:
a. Communal land ownership.
b. Leader decides the management of the production.
c. Production, distribution & use of economic resources based on traditional practices.
d. New technologies are not welcome since they are contrast with practices of ancestors.
e. Economy is not the priority but the religion and culture.
Ex. Mongolia & Maasai Tribe of East Africa

6. 2. Command economy- factors of production are owned & managed by the government.
-addressing economic problem are planned, done & dictated by the government.
-little or no economic political & economic freedom.
Characteristics of command economy:
a. Resource allocation is done by the government.
b. Presence of central planning of all economic activities.
c. No free competition ( government is the only seller)
d. Government plays the role in distributing & production of goods & services.
e. Needs of the people are distributed based on priorities set by the committee
Ex. North Korea, Cuba ( closed country)
3. Market economy- the interaction of consumer & producer is the way of solving economic problems.
- Transaction takes place in the “market” ( method by which buyers & sellers communicate)
- “price theory” – signals to address the economic problem
- Owed this economic system to “Adam Smith”
- “market economy”
Characteristics:
a. Private sector owns & manages production
b. Price system in a market structure applies
c. Minimum government intervention (protection of society)
Ex. Unites States

7. 4. Mixed Economy – with the elements of traditional, command and free market; both private & public institutions
exercise economic control.
Private sector- works through the market mechanism and minor industries such as production & distribution.
Public sector- works through regulatory command & owns/ manages major industries such as transportation,
electricity and others.
Characteristics:
1. Means of production are owned & controlled by private sector & the government.
2. People decide on economic activities within the economy.
3. Problems of distribution or g/s & allocation of economic resources are determined through a combination of
the market system & government laws and policies.
Ex. Philippines
- Methods of economic system involves a way of rationing a scarce resources.
Note: in reality, there is no economy exercises 100% of any of the economic system.

8. The three ISMS: Capitalism, Communism and Socialism ( ideology and political system )
In the last century world has been divided into a great economic & political system.
1. Capitalism- most resources are privately owned, people are free to choose their occupation, production is
determined by price.
Ex. Philippines or US
2. Communism- declares that people owns the means of production & not the government. No system of profit
or wages.
Ex. China or Cuba
3. Socialism- system in which the government owns and operates the major industries of the country.
Ex. England

9. Circular Flow of Production: 2 sector model & 3 sector model
2 sector model
3 sector model

10. The Law of Scarcity
Scarcity- condition that all resources are available only in limited supply.
Time & money- efficiently use at the same time
Law of scarcity- goods are scarce because there are not enough resources to produce all the goods that people
want/desire to consume. (domino effect)
Those things produce from the factors of production is called commodities/ output.
2 kinds of output or goods:
1. Tangible
2. Intangible (services)
Production- act of making goods and services ( transforming input into output- process)
Consumption- act of using the output to satisfy human wants & needs.
Maltusian’s Concept “Thomas Robert Maltus explained the idea of scarcity through his book “an essay on the
principle of population as it affects the future improvement of society.
- The increase of population simply means a decrease of goods and services because of the increase of
consumers.

11. Production Possibilities Frontier (PPF)
- Graph depicts the trade-off of goods & services that can be produced in an economy.
- We consume different goods and services at the same time( basic needs)
Scarcity- indicated unattainable combination above the boundary. ( limited resources)
Choice- the need to choose among alternative attainable points along the boundary.
Opportunity cost- the cost of using them in the best alternatives ( cost of opportunity forgone )
Trade- off- situation in which more of one good can be obtained only through giving up another thing.
“Life is full of choices”
- Due to scarcity of resources, all societies face the problem of what to produce and how to divide the
resources.
• Input – the resources used to produce output ( input- process-output = production)
• Output- combination of output ( goods & services)

12. Option Food Clothing Δ Food
(B-A)
Δ Clothing
(B-A)
Rate of Trade off
ΔC/ΔF
A 0 1000 - - -
B 100 950 100 -50 -0.5
C 200 850 100 -100 -1.0
D 300 650 100 -200 -2.0
E 400 400 100 -250 -2.5
F 500 0 100 -400 -4.0
Production Possibility Frontier (PPF curve)
increasing decreasing
Marginal
opportunity
cost
Note: to increase the output of one good, there is a need to give up of another output- tradeoff ( because of scarcity)

13. Production Possibility Frontier
Infeasible ( not possible in producing 2 goods at
the same time )
Shape of the graph is concave to the origin
( inwards to the axis )- attainable resources are
efficiently employed
Points: A,B,C,D,E,F,H – feasible or able to produce goods and services at the same time
Point: G – infeasible or unable to produce goods and services at the same time.

14. Shift of PPF curve:
To the right- increase of available factor of production or less cost technology advancement therefore, there
is an increase in production or producing 2 or more goods & services at the same time.
To the left- decrease of available factor of production.
Good A
Good B
Note: however, w/ the new PPF curve, trade off is
inevitable & increasing marginal opportunity cost of
producing any good ( gap of opportunity cost)

15. ELEMENTS OF DEMAND AND SUPPLY

16. Elements of Demand & Supply
Producers
“how to economize” – how to get the most of what we have ( minimize cost & maximize profit)
Consumer
“how to get the greatest satisfaction of the goods and services they possess.
Human wants- goods/ services/ circumstances that people desire, which includes:
*basic needs – essentials for man survival.
*goods/ services essential for decent and comfortable living
*luxury goods
*created wants- influenced by advertisement and demonstration effect.
Resources/ inputs- goods and services used to produce goods and services
Output- the result of the combination of one or more inputs to satisfy the needs and wants of consumers.

17. Economic resources and Free resources
Economic resources- are scarce and command non- zero price ( cost something )
a. Land or natural wealth- includes everything above & beneath the land surface “ rent “
b. Labor- the physical/ mental effort exerted in production of g/s. “wages”
c. Capital- man-made wealth includes machineries, equipment, materials, etc. “interest”
d. Entrepreneur- one who organize/manage the resources. “profit”
- These resources are also called “factor of production”
Free resources- abundant and command no price.

18. Basic skills of Agricultural Economist:
1. Economic models- the conceptualization, based on assumption of how economic activity occurs.
( classical economic model: demand & supply model, Production Possibility Frontier model )
2. Ceteris Paribus – Latin phrase means “other factors are held constant”
3. Opportunity cost –value of best forgone alternative
4. Diminishing returns- an additional of something will eventually increase something at decreasing rate,
ceteris paribus. ( Production: LDM Product; Consumption: LDM Utility )
5. Marginality- additional or incremental unit of something
- It is on the margin where economic decisions are made.

19. Logical Fallacies: (usual beliefs that is wrong and not true based on economic explanation)
1. Correlation-Causation Fallacy
Correlation- two events that share some sort of mutual relationship in a regular, predictable fashion.
Causation- two events in which there is a cause and effect relationship between the two.
Fallacy: when two events have a causal relationship, they also have a correlation
Fact: if two economic variable are correlated to one another, it does not imply that one causes the other.
2. Fallacy of Composition
Fallacy: What is true of a part is therefore asserted to be true of the whole.
Fact: What is true for an individual may not true for the group.
3. Post-Hoc Fallacy
Fallacy: The belief that because of one event precedes another, the first is the cause of the second.
Fact: If one event happened after another event, it does not imply that the first caused the second.
4. Zero-Sum Game Fallacy
Fallacy: If someone gains, someone else must lose.
Fact: Most economic transaction are win-win situation.

20. Elements of Demand & Supply
HUMAN WANTS – ARE THE THINGS, SERVICES, GOODS & CIRCUMSTANCES THAT PEOPLE DESIRE W/C
INCLUDES:
A. BASIC NEEDS- ESSENTIALS FOR HUMAN SURVIVAL
B. G/S ESSENTIALS FOR DECENT & COMFORTABLE LIVING LUXURY GOODS
CREATED WANTS- INFLUENCED BY ADVERTISEMENT & DEMONSTRATIONS EFFECT.
* RESOURCES- THINGS/ SERVICES USE TO PRODUCE G/S.

21. Market- it is any set of arrangement by w/c buyers & sellers of a good are in contact to trade g/s. (sari-sari
roadside stand, internet )
Market place- specific facility
- physical facility where buyers & sellers come together (Public Market )
Price System
- Is a component of any economic system that uses prices expressed in any form of money for the valuation &
distribution of g/s & the factors of production
- Simply means that g/s are being acquired by the people paying with their money.
a. Fixed price system- prices are administered by a government body.
b. Free price system- prices are left to float “freely” as determined by supply & demand.
Price- is the amount paid for a certain qty. & qlty. of g/s.

22. Demand ( consumer side )
-The quantities of good that buyers are willing to buy at a series of alternative prices, in a given market, during
a period of time, ceteris paribus.
•Is a relationship, not a quantity.
•Describes consumers desires, not their action.
•Describe the willingness (behavior) of people to buy a particular product.
•Describe in four ways: words, curve, schedule & function.
Demand schedule- is a tabulation of the quantity of a good that consumers in a market will purchase at any
given prices.
Hypothetical Market Demand Schedule for good X per week
Price of X ( per kilo) Qd ( in kilos)
P45 100
40 150
35 200

23. Demand curve- is a graphical representation of the market demand schedule; therefore, contains the same
prices & quantities presented in the demand schedule. Graph depicting the relationship between price &
quantity.
Demand equation/ function- mathematical function showing relationship between Qd of a commodity and the
factors influencing demand. Qd= a - Pb
Ex. Qd= f( P; Prg, Y ) where: Qd – quantity demanded
P- price of the good
Prg- price of related good
Y- income
* Function on the right side of the equation is the demand function.

24. Demand Function/ Equation – mathematical expression of the “law of demand” the relationship between price &
quantity ( negative relationship or downward sloping)
Linear demand function:
Qd= f( P,Y,Pc,Ps)
Qd= a-bP + cY+ dPc+ ePs
Qd= a- bP + x
Therefore:
Qd= a-bP
Where:
P- price
Y- income
Pc- price of related goods
Ps- price of substitute
x- sum of Y, Pc, Ps or the other determinants w/c are held constant, so x = 0
a-intercept (x &y intercept)
b-slope w/c is rise/run
b=rise/run = slope
Assump.: P = 2
Ex. Qd = 1200 – 200 (P)
= 1200 -200 (2)
= 1200 – 400
Qd = 800
- means if P increase by
1000, Qd will decrease by
200

25. Quantity Demanded (Qd)- specific point in demand quantity.
-Refers to how much of a g/s a buyer is willing to buy at a single specified price, in a given market, at a given
time, ceteris paribus.
Note: Demand is a relationship not a point on that relationship. On the other hand, Qd is not a relationship but a
point on that relationship.
Law of demand
-States that there is a negative (inverse) relationship between Qd & the price, ceteris paribus.
-Means that as price of a good decreases, ceteris paribus, Qd increases, vice versa.
-People are willing to buy more goods if the price is low.
Reasons of negative relationship:
1. Substitution effect- when there is a change in Qd due to the change in the price of one good (A) relative to
another good (B). Consumer take the good whose price stayed low & substitute it for the good whose price
increases.
( Pa; Qda, Qdb )
Note: Assumed income still the same
Ex. P mango increases, Qd of mangosteen increases.

26. Example:
A person goes to the store every morning & buys 2 donuts & 2 bagels for breakfast. Let say that the cost the
same. But now, what happens if the price of donut goes up from .75 to P1 , while the bagels stay the same. It
may be that the person start to buy 3 bagels & only 1 donut.
-The Qd of donut fall because its price increase relative to bagel & the customer bought the third bagel as a
substitute for the second donut.
2. Income effect- a change in price w/c affect buyers’ purchasing decision.
The increase in price of a good, make you feel poorer than you were before & so you buy less. ( Pa; Qda,
Qdb )
- A change in individual’s income show how that change impacts in the Qd of a g/s.
Example: if a consumer spend ½ of his income on the bread alone, a 50% decrease in the price of bread,
will increase the free money available to him by the same amount w/c he can spend in buying more bread
or in something else.

27. Change in Demand (D) & Change in Quantity Demanded (Qd)
Change in demand- it is a change or a shift of the entire demand curve w/c either to the right upward (
increase ) or to the left downward (decrease)
-Refers to the change in the ceteris paribus assumption, ( non-price determinants )
1. Consumers income (+/-)
- A higher income level generally translates into greater ability to buy g/s. however, it is possible for the
demand to decrease when consumer’s income increases.
Normal goods- goods for w/c demand increases as income increases, vise versa. ( D, I )- positive
relationship
Inferior goods ( luxury goods)- goods for w/c demand increases as income decreases, vise versa. ( D, I )
– negative relationship
• I, D normal goods, D inferior goods
• I, D normal goods, D inferior goods

28. 2. Number of potential buyers (+)
- Decrease in potential buyers , decreases demand
- Increase in potential buyers, raises demand
3. Taste & preferences (+)
- Decrease in taste & preferences, decreases demand for good
- Increase in taste & preferences, increases demand for good
4. Consumers Expectation (+ )
- If people expect that the price will increase , next period, demand at present will increase.
- If people expect that the price will decrease , next period, demand at present will decrease.
*Expectations about future income also affect current demand . If we expect some inheritance or we look
forward to a rise in income after college graduation, current demand for g/s increases. On the other
hand, those who expect to lose their job due to bad economic condition, will reduce their demand for a
variety of goods in the current period.

29. 5. Price of related goods (+ for substitute goods ; - for complements goods)
Substitute goods- an increase in price of good A, the demand of good B will also increase. ( Pa, Qdb ),
vise versa.
Complement goods- an increase in the price of good A, the demand of good B will decrease. ( Pa, Qdb )
– printer & ink
6. Credit availability- availability of credit increase the demand for g/s.
Change in Quantity demanded
- Refers to the movement along the curve cause by a change in the own price of the good & services.
- It is represented by a movement from one point of the demand curve to another point.

33. Change in Supply & Change in Qs
Change in Supply
-the rightward (increase) or left ward( decrease) shift of the entire supply curve due to the change of non-
price determinants of supply or a change in the ceteris paribus assumption.
Non- price determinants of supply curve:
1. Price of inputs (-)
- A decrease in the price of inputs, increases the supply of g/s. ( falling raw material cost will reduce the
production cost of firms allowing them to expand output levels )
- An increase in the price of production inputs , decreases supply of g/s. When price of inputs to produce
increase, firms cannot produce & offer the same quantity as before because of higher production costs.
2. Technology ( +)
- A change in production techniques can lower o increase production costs. A cost saving invention will
enable firms to produce & sell more goods than before at any given prices. Improvements in technology
increases supply of g/s

34. 3. Number of producers / firms in the industry (+)
- Decrease in the number of producer, decreases the supply of g/s.
- Increase in the number of producer, increase the supply of g/s.
4. Taxes (-)
- Increase in taxes , decrease supply of g/s.
- Decrease in taxes, increases supply of g/s.
5. Subsidies (+)
- A reduction in subsidies , decrease supply of g/s.
- An increase in subsidies , increases supply of g/s.
6. Weather Condition(+)
- Good weather, increases supply of agricultural products
- Bad weather , decreases supply of agricultural products
7. Producers expectation (-)
- When producers expect that the price of the product will increase in the future, they may hoard their output
& store it for later sale, effectively reduce the supply of the current period.
- When they expect that prices will fall in the future, supply increase in the current period, as they dispose their
inventory at current prices.

35. Change in Quantity supplied
-The movement along the supply curve caused by the own price of goods & services.
-Represented by a movement from one point of the supply curve to another.

38. Market Disequilibrium
-The result if the market is not equilibrium or balance.
-Market disequilibrium result if the demand price is not equal to the supply price & Qd is not equal to Qs.
-The result of imbalance between these two forces is the existence of Shortage & Surplus, w/c induces a
change in price.
What happens when there is an existence of shortage?
What happens when there is an existence of surplus?

41. The basic economic problems could be answered in determining the equilibrium price and quantity or the
demand & supply.
What to produce? This is answered by the market signal
ex. High oil prices this would encourage for oil production.
For whom to produce? This would be answered by the dictate of income & consumption of the society (
purchasing power )
The question “how” is decided by supply & demand.
Ex. When corn prices are low, it is not profitable for farmers to use expensive tractors & irrigation system.

42. CONCEPTS OF ELASTICITY

43. Concepts of Elasticity:
1.Price elasticity of demand
2.Income elasticity of demand
3.Cross – price elasticity of demand
4.Price elasticity of supply

44. Elasticity- is a measure of how much the Qd of g/s changes in relation to its
price, income or supply.
Price Elasticity of demand
-the responsiveness of Qd to the change in the commodity’s own price.
2 methods:
1. Point Elasticity method- measure s the elasticity at one point on the
demand curve.
2. Arc elasticity method- measure the elasticity between two separate points
on the demand curve.
Еp=
% Δ Qd
% ΔP
=
Δ Qd
Δ P
x
Po
Qd0
where: Δ Qd - the change in Qd
ΔP- change in price
Qdo- original Qd
Po- original price
Еp=
Δ Qd
Δ P
x
P
Qd
where: Δ Qd - the change in Qd
ΔP- change in price
Qd- average Qd
P- average price

45. Interpreting the coefficient of a price elasticity of demand:
For instance the computed Ep x = /-4/. This means that a 1% increase
(decrease) in the price of good x result in a 4% decrease (increase ) in the Qd of
good x.
1. / Ep / < 1 - demand is inelastic
- Qd is relatively unresponsive to change in price
- the percentage change in Qd is less than the percentage
change in price .
2. /Ep/ > 1 - demand is elastic
- Qd is relative responsive to price change.
- the percentage change in Qd is greater than the percentage
change in price.
3. /Ep/ = 1 - demand is unit elastic.
- the percentage change in Qd is equal to the percentage
change in price.
- the price increase leads to a decrease in Qd that is just
sufficient to leave the total expenditure on the good
unchanged.

46. Continuation……
4. /Ep/ = 0 - demand is perfectly inelastic
- Qd remains constant at all price level.
5. /Ep/ is infinite - demand is perfectly elastic
- means that a very small change in price causes an
infinitely large change in Qd.
Shape of the demand curve:
1. Inelastic
2. Elastic
3. Unit Elastic
- Demand curve is steeper
- %P > %Qd
- Demand curve is slightly flatter.
- %Qd > %P
-Demand curve is 45 degree
- %Qd= %P

47. Continuation…..
4. Perfectly inelastic
5. Perfectly elastic
-Demand curve is vertical
-Demand curve is horizontal
The steepness of the demand curve is one way of measuring how Qd of the
good is affected by its price.
-A steep demand curve means that the Qd does not respond much to price change.
-A relatively flat demand curve means that the Qd responds greatly to price
change.

48. Determinants of the price elasticity of demand:
1. The price elasticity of demand for a commodity depends on the number &
closeness of the substitute that are available.
- If a commodity has many close substitute, its demand is likely to be elastic.
- If a commodity has less close substitute available, the demand is inelastic.
- If a commodity is defined so that it has perfect substitute available, its price
elasticity of demand is infinite.
2. It is sometimes asserted that the price elasticity of demand for a commodity
is likely to depend on the importance of the commodity in consumer’s
budget.
- In general, luxury goods (non basic) are considered price elastic while
necessities (basic) inelastic.
3. The price elasticity of demand for a commodity is likely to depend on the
length of time/period to which the demand curve pertains.
- In general, demand is likely to be more elastic over a long period of time than
over a short period of time. The longer the period of time, the easier it is for
the consumer & business firms to substitute one good for another.

49. Demand Price change Effect o f Price change to
expenditure of household
( consumer side)
Inelastic (unresponsive) P increases
P decreases
HE will increase
HE will decrease
Elastic (responsive) P increases
P decreases
HE will decrease
HE will increase
Unit Elastic P increases
P decreases
HE will not change
HE will not change
Relationship of Price elasticity & total Expenditure of household

50. The relationship of price elasticity of demand & Total revenue
Demand Price change Effect of Price change
to TR
( producers Side)
Inelastic P increases
P decreases
TR increases
TR decreases
Elastic P increases
P decreases
TR decreases
TR increases
Unit Elastic P increases
P decreases
TR will not change
TR will not change
When demand is inelastic, price increase leads only a small decrease in Qd,
sellers still received revenue so it increases.

51. Income elasticity of demand
-the responsiveness of Qd to the change in the consumers income.
2 methods:
1. Point Elasticity method
2. Arc elasticity method
ηi=
%Δ Qd
% Δ I
or ηi =
Δ Qd
Δ I
x
I0
Qd0
ηi =
Δ Qd
Δ I
x
I
Qd

52. Interpreting income elasticity of demand:
-Suppose the computed N1= 3.0, this means that a 1% increase (decrease ) in
consumers income results in a 3% increase (decrease ) in Qd.
Note:
•Goods that have positive income elasticity, indicates that an increase in
consumers (money ) income results in the increase in the amount of the good
consumed.
•Goods that have negative income elasticity, indicates that an increase in the
consumers (money ) income results in a decrease in the amount of the good
consumed.
Income elasticity Value & implication:
•If Ni is positive (+), the good is called normal good. (I, D)
•If Ni is negative (-) , the good is called inferior good. (I, D)

53. Continuation……..
•Ni > 1 -elastic
-Means that a 1% change in money income, results in more than 1 % change
in total Qd.
•Ni< 1 - inelastic
-Means that 1 % change in money income, results in less than 1 % change in
total Qd.

54. Cross Price elasticity of demand
-The responsiveness of the Qd resulting from a change in the price of related
goods.
2 methods:
1. Point elasticity method
2. Arc elasticity method
Θ xy =
% Δ Qdx
% Δ Py
Θ xy =
or
Δ Qdx
Δ Py
x
Py0
Qdx0
Θ xy =
Δ Qdx
Δ Py
x
Py
Qdx

55. Cross price elasticity of demand implications:
Good X & Y are classified as substitute & complement depends on the cross
price elasticity of demand is positive or negative.
Substitute goods- one good that can be used instead of another.
( Px, Qdy  )
Complement goods- a good whose use is related to the use of an associated
or paired good. (printer & ink, DVD player & tape )
•When cross price elasticity of demand is positive (+ ) , greater than 0 then two
good are substitute.
•When cross price elasticity of demand is negative (- ), less than 0 then two
goods are complement.
•When cross price elasticity of demand is = 0 , then two goods are
independent of each other.

56. Price elasticity of supply
-The responsiveness of Qs to the change of the commodity’s own price.
-Since price is positive related to price, the sign coefficient is positive.
2 methods:
1. Point elasticity method
2. Arc elasticity method
Es =
% Δ Qs
% Δ P
Es =
Δ Qs
Δ P
x
P
Qs

57. Elasticity of supply value & its implications:
1. Es > 1
- supply is elastic
- Implies that a change in price result to a greater change in Qs
- Means that producers are very responsive to price change.
2. Es < 1
- Supply is inelastic.
- Implies that a change in price results to a lesser change in Qs.
- The producer therefore, have a very weak response to price change.
3. Es =1
- Supply is unit elastic
- A change in price results to an equal change in Qs.
4. Es – is infinite
- Supply is perfectly elastic.
- Implies that a small change in price, there is an infinite change in Qs.
5. Es= 0
- Supply is perfectly inelastic.
- Implies that there is no qty response to price change; supply is fixed.

58. Determinants/ factors of price elasticity of supply: (producers side )
1. Time period- if price of good increases & producers have enough time to
make adjustment the level of output, the elasticity of supply will be more
elastic. If the time period is short & the supply cannot be expanded after a
price increase, the supply is inelastic.
2. Ability to store output- output which can be stored have relatively
elastic supply over the goods which are perishable & do not have storage
facilities.
3. Factor mobility- if the factors of production can easily move from one use
to another, it will affect elasticity of supply. The higher the mobility factor ,
the greater is the Es of good & vise versa.
4. Change in marginal cost of production- if with the expansion of
output, marginal cost increases & marginal return decreases Es will be less
elastic.
5. Excess Supply- when there is excess capacity & producers can increase the
supply easily to take advantage of the rising prices, the supply is more
elastic. In the case that production is already up to the maximum from the
existing resources ( production limit), rising prices will not affect supply in
short period of time. Es will be more inelastic.

59. Continuation…..
6. Agricultural or industrial product- In agriculture, time is required to
increase output in response to increase in price. The supply or agricultural goods
is fairly inelastic.
As regard to the supply of manufactured goods, it is comparatively easy to
increase production in a short period of time. Therefore, the supply of these
goods is fairly more elastic.
In case of supply of airplanes or any other heavy machineries, the supply is
relatively inelastic as it take time to manufacture.

60. Concept of production &
cost:
A.Theory of Production
B.Production Function
C.Theory of Cost

61. Theory of Production
-An analysis of input- output relationship.
-It is a process of converting inputs ( factors, resources ) into outputs ( products )
Production – the transformation of inputs into outputs.
Inputs of production- the factors of production ( inputs use in production )
Factors of production:
1. Land - “ rent “
2. Labor – “ wages “
3. Capital “interest “
4. Entrepreneur “profit “
Output- is the result that has been created by the inputs (when labor & capital are
combined .
2 types of output
1. Goods
2. services

62. •The quantity & quality of labor & capital & all other inputs have a direct
impact on the quantity & quality of an output.
•With the use of the technology of the firm inputs are turned into output.
In some instances, output of the firm is an output for other firms.
Ex. Steel is final output of National Steel Corporation but for Toyota Motors it
is a raw materials together with labor, machines & tools (inputs ) to produce
car.
Classification ( factors of production ):
1. Fixed factor - remains constant regardless of volume of production.
( land , buildings , machinery )
2. Variable factor- changes in accordance w/ the volume of production
( fertilizer, labor , etc )

63. Production Function
- Show the relationship between of various inputs used & the maximum output
that can be produced with those inputs used per unit of time.
-Can be expressed in a table, graph or an equation.
Length of production Analysis: ( short-r un or long-run )
Length of run- period of production.
•Long- run- all factors ( inputs) are variable or can be change.
•Short-run - the use of at least one factor of production cannot be change
(fixed inputs ) – fixed & variable input used.
•Very short run- all inputs are fixed ( so short that non of the inputs are
variable )

64. Continuation…….
Reason why we need to know the length of run of the production?
In the short- run (fixed & variable input )
-The firm determine which variable resources should be combined with the
fixed resources in order to maximize the profit of enterprise.
In the long-run ( all variable input )
Firm must evaluate investment alternatives whether the firm should purchase
more land or more equipment.

65. Production Function
-Refers to the technical relationship between the application of inputs &
resulting to maximum output.
-The result of combining the four factors of production in a technical
proportion.
-The aim of producer is to maximize the production at minimum cost by means of
the best combination of factors of production.
Inputs- are very important in the production process.
2 kinds of inputs:
1. Fixed inputs- inputs whose use rate does not change as the output level
change. (land)
2. Variable inputs- inputs whose rate changes as the output level changes.
(fertilizer, labor )
Output - refers to the g/s have been created by inputs.

66. Returns to scale
What will happen to output if all inputs are increased proportionally?
Increasing Return to scale- increasing 1 unit of input causes output to
increase more than 1 unit of output.
Constant Return to scale- increasing 1 unit of input causes output to increase
the same unit .
Decreasing return to scale- increasing 1 unit of input result to less than 1 unit
of output.
* It is normal for firms to encounter increasing returns to scale at an initial
range of output & then perhaps to meet decreasing returns to scale as they
become large scale operation.

67. Production analysis w/ one variable input ( Short- run )
Total product (Q)- total amount of output produced in physical unit.
Average Product- measures the total of output per unit of input used.
- shows the “productivity “ of an input.
Ex. AP= 5 , it means that one unit of input is capable of producing 5 units of
output.
Marginal product- range of change of output as an input change by one unit-
- Additional unit of output w/ respect to the additional unit of input.
Law of diminishing returns- the additional unit of variable input combine
with the fixed input, result to an additional unit of output at decreasing rate.
- “Law of variable proportion”

68. Land Labor
(Input )
TP
(Q)
AP of labor (Apl
)
APl= TP/L
MP of labor
(MPl)
MPl= ΔTP/ΔL
A 1 0 0 0
B 1 1 4 4
C 1 2 10 5
D 1 3 18 6
E 1 4 24 6
F 1 5 28 5.6
G 1 6 30 5
H 1 7 30 4.29
I 1 8 28 3.5
J 1 9 24 2.67
Continuation…..
Production Function in Producing Rice
Note: Labor is the variable input
Land is the fixed output
4
6
8
6
4
2
0
.2
.4
MPl > APL
MPL=APL
MPL< APl
Stage I
Stage II
Stage III
IRS
Deminishing return
DRS

69. Continuation……
Consider Point E:
APL= 6 , means that additional labor employed it produce an average of 6 units
of output.
MPL= 6, means that the last labor employed produced an additional 6 units of
output.
* Law of diminishing Marginal Returns
-As we can observe in the table, by holding 1 constant input ( land ) &
continually increasing the other input (variable- labor ). There is a point where in
an additional input , result to an additional output at decreasing rate ( fall )
Reflect : APL & MPL (it fall )
Important relationship between MPL & APL
•MPl> APL , APL increases as labor input increases.
•MPL = APL, APL is constant.
•MPl< APL, APL will fall as labor increases.

70. Three Stages of Production
-It will help us define the quantity of labor ( or any other input) that a profit
maximizing firm will employ.
Stage I
- starts at the origin until the highest portion of the APL ( APL=6 , L = 3 )
Stage II
-From the highest portion of APL until MPL= o ( APL= 6; L= 3, MPL = 0; L= 6 or
7 )
Stage III
- Begins where MPL=0 until its negative range.
At what stage producers maximize
his profit?

71. Three stages of production:
stage I
-the initial increase in MP illustrate
that output increases at increasing rate.
Producers does not fully maximize his
profit ( does not reach the optimum
level )
- The amount of fixed input that each
unit of variable input utilizes has not
yet been fully exploited ( there is still a
room for production )
Stage III
- MPl at this stage is negative, the
additional unit of input employ result
to negative (such a waste)
-All product curve are decreasing.
Ex. Employ 2 shovel for 4 person to
dig a whole.

72. Continuation…….
Stage II
-Is the most favorable stage of production because MPL & APL are both positive
though declining but still , the additional input employ, still increase the output
though at decreasing rate.
- illustrate the efficient level of input- output ration for the producer.
Can we pinpoint an exact combination of inputs in relation
to output that would maximize profit for the firm???
Ans. NO!
Production capacity is not the only factor affecting
profitability of production. Another one is the
PRODUCTION COST

73. Production with two variable input:
- Is a process determining the output by employing two variable input such as
K & L
Isocost- show the different combination of K (capital) & (L) labor that a
producer hire given his/her total outlay (investment) & the factor prices
Isocost
K
L
10
5
Ex. Pk=2.00
Pl = 4.00
outlay= 20
- If purchase all in capital (20/2=10)
- If purchase all in labor (20/4= 5 )
If isocost shift to the right ( increase in outlay)
If isocost shift to the left (decrease in outlay)

74. Isoquant- a curve which shows the different combination of (K) capital and (L)
labor which yield same level of output.
9
3
- Shift of isoquant to the right means an
increase in production
- Shift of isoquant to the left means a
decrease in production
Combination of
K9 & L3= 50kg
Marginal Rate of Technical Substitutions- the amount of capital that produces
is willing to give up in exchange for labor and still lie on the same amount of
output.

75. Theory of Cost
Accounting VS. Economic Cost
Economic cost- forward looking cost (future cost )
- this cost has something to do with the potential
profitability of the firm.
Opportunity cost- refers to the value of the best foregone alternative.
Accounting cost- recognize cost only when these are made & properly
recorded.
Implicit Vs. Explicit Cost
Explicit cost- refers to the actual expense of the firm purchasing or hiring the
inputs it need.
Ex. Firm purchase a machine, rent a building worth 1M per month.
Implicit cost- refer to the value of inputs being owned by the firm & used in
its own production process.
- These two are included in economic cost.

76. Cost-output Relationship in the Short-run
In a short run firm - one input is constant ( fixed )
The ff. Are types of short-run cost:
1. Total Cost- represents the lowest total expense needed to produce each
level of output. (Q)
*TC rises as Q rises.
Total Cost divided into 2:
Total Fixed Cost (TFC) – “sunk cost “total money expense that is paid out
even when no output is produced . It is unaffected by any variation in the
quantity of output.. (rent expense, salaries of top mgt., depreciation expense )
Total Variable Cost (TVC) - represents expense that vary w/ the level of
output such as raw material, wages & fuel & includes all cost that are not
fixed. ( wages , operating expense: light, fuel & water, payments to raw
materials.
TC= TFC + TVC

77. Continuation……
2. Average Total Cost ( ATC) - the cost per unit of output.
ATC = ATC/Q or ATC= AFC+ AVC
Average fixed Cost (AFC )- total fixed cost divided by the number of output
produce (Q).
AFC= TFC/Q
Average Variable cost (AVC) - total variable cost divided by the number of
output produced (Q).
AVC= TVC/Q
3. Marginal Cost (MC)- denotes the extra or additional cost of producing 1
extra unit of output (Q).
MC= ΔTC / ΔQ
AFC curve is rectangular hyperbola
AVC is U-shaped curve

78. Note: ATC & AVC reflects the Law of Variable Proportion or the Law of
Diminishing Return to the variable of production. Note:
The traditional theory of cost postulates that in short run the cost curves
(AVC,ATC & MC ) are U-shape reflecting the law of variable proportions.
MC
ATC
AVC
X
Y
MC= ATC, ATC is at its min.
-Profit maximization
MC = AVC, VC is at its min/max
- Cost minimization

79. Profit Analysis:
Business profit- refers to the difference between total revenue & explicit cost
Economic profit- difference between total revenue & both explicit & implicit
cost
Profit (π ) = TR – TC
TR = P x Q
-To maximize profit, firms must find the equilibrium price & quantity that give the
largest profit on the largest difference between TR & TC.
Rule:
TR >TC – firms incurs profit
TR< TC – firms incurs loss
TR=TC – break even point <BEP> ( no loss, no gain )

80. Fig. 56 A
-Shows the relationship between TR & TC
Fig. 56 A-I (TR<TC ) = area III shows negative effect.
Fig. 56 A- II (TR>TC ) = area IV shows positive result
in profit
Fig 56 B
-Represents profit area.
The firm is equilibrium if total revenue equals total
cost.

81. Market Structure- refers to the numbers of firms in an industry & the relation
among them.
2 types of market structure:
1. Perfect market- market situation which consist of a very large number of
buyers & sellers offering a homogenous product.
Condition:
*Atomistic- firm is assumed so small relative to total market that the action of
single firm will not affect the market.
*Homogenous product- producers output cannot be distinguished from that
another producers.
*Free entry & exit
*All buyers have perfect knowledge of market condition.
*firm is price taker

82. 2. Imperfect market- market situation wherein the conditions necessary for
perfect competition are not satisfied.
-Few sellers which enough to affect market price.
Forms of imperfect market:
1. monopoly- there is one sellers of goods & services.
- Can influence & has considerable control over price – price maker
Cartel- refers to a market situation in which firms agree to cooperate w/ one another
to behave as one as if they were single firm & eliminate competitive behavior
among them. ( Organization of Petroleum Exporting Countries )
- One producer or sellers of g/s & only one provider of service in market.
- Difficult to entry
- Operates under economies of scale.
Note: economies of scale- refers to the reduction in per unit of cost thru an increase
in production volume.
Ex. Utilities (water, electricity ), microsoft, google

83. 2. oligopoly- market situation where there is a small number of sellers
- Small numbers of firms
- Firm as control of price
- Extreme difficulty to entry & exit
Ex. Oil companies, telecommunication companies, cars

84. Monopolistic Competition
There are many sellers producing highly differentiated product,
-Large number of sellers & buyer
-Limited control of price product
-Sellers offer differentiated product or similar but not identical.
-Entry in market easily
-Economic rivalry centers
Ex. Bank, restaurant, hotel
Monopsony- there is only one buyer of goods & services (no close substitute )
Napkins, post office,
Oligops0ny- there are small numbers of buyer
cocoa/cacao – 3 firms ( cargill,archer Daniels midland & barry Calebaut) buy the
vast majority of world cocoa bean production, mostly from small farmers in the
third world countries.

85. End of
discussion……….…….