ECONONE REVIEWER FOR THE 2ND TERM

COURTESY OF BNE11

Cost of Production

- Supply and demand are the two things that we consider in economics, and together with market
equilibrium, they explain microeconomics.
- In the Law of Supply, it states that firms will increase their output, and sell more if the price of a good is
high, and is manifested in the upward sloping supply curve. This is because every firm’s objective is to
maximize the profits.

Profit= total revenue- total cost

Total revenue is the total amount collected by the firm which is price x quantity. While total cost is the total value
of the input products used to make the products.

Economic and Accounting Profit

Economic includes both the implicit and the explicit costs so it is the total revenue minus the explicit and implicit
costs, while the accounting profit includes only the explicit costs. To solve for the accounting profit, it is the total
revenue minus the explicit costs.

- Implicit costs are the forgone alternative actions without an actual payment
- Explicit costs are the payments made by a firm (direct need to pay or outlay)
- Because both implicit and explicit costs are considered, economic profit is always lower than the
accounting profit.

Production Function

- It basically shows the relationship between he quantity of inputs used and the quantity of outputs.

Marginal Product- is the increase in output for every additional unit of input.

Diminishing Marginal product

- The marginal product of an input decreases as the amount of input increases.

- Ex. As more and more workers are hired, the marginal product decreases, this is because the workspace
may be limited and less and less work falls to each worker.
- When graphed, the slope in the marginal product becomes flatter and flatter.

Total-Cost Curve shows the relationship between the quantity of the product produced and the cost of producing
the product. This determines the pricing of a good.

2 types of costs:

Fixed costs- ones that o not change regardless of the output. Such would be the rent and etc.

Variable costs- ones that vary when production or the quantity produced changes.
Total Cost = total fixed costs + total Variable costs.

Average cost is basically the firm’s cost divided by the quantity produced.

- ATC= AFC + AVC

Marginal Cost

- Measures the increase in cost for every additional unit of output produced.

(c h a n g e in to ta l c o s t) ∆ T C
M C = =
(c h a n g e in q u a n tity ) ∆ Q
- The marginal cost rises when more is produced. This is because of the diminishing marginal product.

Cost Curves and their Shapes

- The ATC is U shaped

- The bottom of the U shaped curve is where the ATC is at its lowest and is referred to as the efficient scale.
( marginal cost curve crosses the average total cost curve)
- ATC is high at when very little is produced because the AFC is spread over a small quantity
- ATC declines as output increases
- The ATC rises because the AVC also rises

Marginal Cost and Average Total Costs

- MC<ATC, ATC is going down

- MC>ATC, ATC is rising

Short run and Long run- in the short run, most costs are fixed, but in the long run, all fixe costs become
variable costs.

Economies of scale- a property where the long run ATC falls as the output increases

Diseconomies of scale- a property where the long run ATC rises as the output increases

Constant Return to scale-a property where the long run ATC remains the same as the output increases

Source: Villegas, B.M. (2001). Guide to Economics for Filipinos. Philippines: University of Asia and the Pacific

Exercise: Identification

1. A venue for interaction between buyers and sellers.

2. A type of economy where the government intervenes in the market in the distribution and production of goods.

3. It is when human wants (material or non material) exceed available resources.

4. Inputs to produce goods and services.

5. The study of economics as a whole.

6. He founded Macroeconomics.

7. An economic approach that is objective and is based on facts rather than beliefs.

8. It is the measure of responsiveness of quantity demanded for a certain good in the price of that good.

9. Measurement of Satisfaction.

10. Additional Satisfaction one gets from consuming more unit of something.

11. It is the maximum allowable price which is set by the government.

12. Levy on local goods and services.

13. Taxes imposed on harmful goods/vices such as smoking, alcohol, etc.

14. A good that violates the law of demand.

15. A good for which an increase in income, increases consumption.

16. A good for which an increase in income, decreases consumption.

17. The effect of a price change in the quantity demanded due exclusively to the fact that its relative price has changed.

18. The percentage change in the quantity supplied divided by the percentage change in price.

19. A market structure in which there is only one seller in the market.

20. A short-run condition of a firm that stops producing but is still incurring fixed cost.

21. A period of time over which only one of the firm’s inputs is variable, while all others are fixed.

22. A curve showing all the input combinations that yield the same level of output.

23. The formula for Total Cost.

24. Two inputs that have a constant marginal rate of technical substitution of one for the other.

25. This is exhibited when long-run average costs fall as output rises.

26. These are perfect substitutes with a marginal rate of substitution of one. These goods are considered identical by buyers.

27. The price change in the quantity supplied divided by the change in price.

28. A graph that shows the maximum amount of one output that can be produced, given the amount of the other output.

29. The change in revenue due to sale of one more unit of output.

30. A market structure wherein each producer is a ‘price-taker.’

Answers
1. Market

2. Command Economy

3. Scarcity

4. Resources

5. Macroeconomics

6. John Mayner Keynes

7. Normative Economics

8. Elasticity

9. Utility

10. Marginal Utility

11. Price Ceiling

12. Taxes/Tariffs

13. Sin Tax

14. Giffen Good

15. Normal Good

16. Inferior Good

17. Substitution Effect

18. Elasticity of Supply

19. Monopoly

20. Shut Down

21. Short run

22. Isoquant

23. Total Cost = wage * labor + rent * capital

24. Perfect Substitutes

25. Economies of Scale

26. Homogenous goods

27. Elasticity of Supply

28. Production Possibility Curve

29. Marginal Revenue

30. Perfect Competition