Socioeconomic Factors Affecting
Business and Industry: Product Theory
Production
Production is a process of
combining various inputs to
produce
an
output
for
consumption.
Input
The
term
input refers to
the
resources
used to produce
goods
and
services.
Output
Output refers to
the product created
as a result of the
combination
of
input
in
the
production
process.
Production Theory
In economics, production theory
explains the principles in which the
business has to take decisions on how
much of each commodity it sells, how
much it produces, and how much of raw
material ie., fixed capital and labor it
employs.
Production Function
The Production Function is an
equation showing the maximum output
of a commodity that a firm can produce
per time with each set of inputs.
𝑄 = 𝑓(𝑖)
Where: 𝑄 = output and 𝑖 = input
Production Analysis
Production analysis is concerned
with the analysis in which resources
such as land, labor, and capital are
employed to produce a firm’s final
product.
To produce goods, the basic inputs are
classified into two divisions:
•fixed inputs
•variable inputs.
Fixed Inputs
Fixed inputs are resources
that remain constant in the
short-run.
Variable Inputs
Variable inputs are resources
which can be changed in the
short-run or long-run.
Short-run
The short-run is the period in
which at least one factor of
production is considered fixed.
Law of Diminishing Marginal Returns
The law of diminishing marginal
returns is a theory in economics that
predicts when the optimal level of
capacity is reached, adding a factor of
production will actually result in a
smaller increase in output.
Law of Diminishing Marginal Returns
Output produced is measured in three
forms:
•Total Product (TP)
•Marginal Product
•Average Product
Total Product (TP)
It
is
the
combined
production of several units of a
given input.
Total Product (TP)
PIZZA RESTAURANT
Oven, Tables, Chairs
WORKER
1 WORKER = x units
2 WORKER = 2x units
Marginal Product
It is the additional output
produced by an additional unit
of the input and is equal to
change in total product/change
in input.
Marginal Product (TP)
RESTAURANT
WORKER
1 chef = x units
2 chef = 2x units
3 chef = 2.5x units
Average Product
It refers to the average
contribution per unit of input
and is equal to TP/i.
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12.3
Socioeconomic Factors Affecting
Business and Industry: Government
Policies
Fiscal Policy
Fiscal policy is a tool by
which a government adjusts its
spending levels and tax rates to
monitor and influence the
nation's economy.
Fiscal Policy
Fiscal policy is based on the
theories of British economist
John Maynard Keynes, known
as Keynesian Economics.
Fiscal Policy
“Tax Reform for Acceleration and
Inclusion (TRAIN)”
Fiscal Policy
The idea is to find a balance
between tax rates and public
spending.
Fiscal Policy
“Increasing spending or lowering
taxes” also known as
expansionary fiscal policy
runs the risk of causing inflation
to rise.”
Fiscal Policy
Pumping money into the
economy by decreasing taxes and
increasing government spending
is known as pump priming.
Monetary Policy
Monetary policy refers to the
actions undertaken by a nation's
central bank to control the money
supply to achieve macroeconomic
goals that promote sustainable
economic growth.
Monetary Policy
Monetary policy consists of
management of money supply and
interest rates, aimed at achieving
macroeconomic objectives such as
controlling inflation, consumption,
growth, and liquidity.
Monetary Policy
Monetary policy is formulated
based on the inputs gathered from
various sources.
Monetary Policy
Monetary policies can be categorized
as expansionary or contractionary.
Monetary Policy
If a country is facing a high
unemployment rate during a
slowdown or a recession, the
monetary authority can opt for an
expansionary policy aimed to
increase economic performance and
expanding economic activity.
Monetary Policy
The increased money supply can
lead to higher inflation, raising the
cost of living and the cost of doing
business.
Monetary Policy
Contractionary monetary policy,
by increasing interest rates and
slowing the growth of the money
supply, aims to bring down inflation.
This can slow economic growth and
increase unemployment but is often
required to tame inflation.
Impact of Business on the Community:
Efficiency in Perfectly Competitive
Markets
Marginal Cost
Marginal cost of production is the
change in the total production cost
that comes from making or producing
one additional unit.
Marginal Benefit
Marginal benefit is the maximum
amount for a consumer is willing to
pay for an additional good or service
Productive Efficiency
Productive
efficiency
means
producing at the lowest cost possible
without any waste.
Allocative Efficiency
Allocative efficiency means that
among the points on the production
possibility frontier, the point that is
chosen is socially preferred. It
means that businesses supply what
people demanded.
Impact of Business on the
Community: Market Failure
Market Failure
Market failure is the economic
situation defined by an inefficient
distribution of goods and services
in the free market. In market failure,
the individual incentives for rational
behavior do not lead to rational
outcomes for the group.
Causes of Market Failure
1. Positive and Negative Externalities
An externality is an effect on a third
party that is caused by the consumption
or production of a good or service.
Causes of Market Failure
1. Positive and Negative Externalities
A positive externality is a positive
spillover
that
results
from
the
consumption or production of a good or
service.
Causes of Market Failure
1. Positive and Negative Externalities
A negative externality is a negative
spillover effect on third parties.
Causes of Market Failure
2. Environmental Concerns
Effects on the environment as
important considerations as well as
sustainable development.
Causes of Market Failure
3. Lack of Public Goods
The public goods are commodities or
services that benefit all members of
society, and which are often provided for
free through public taxation.
Causes of Market Failure
3. Lack of Public Goods
An important issue that is related to
public goods is referred to as the freerider problem.
Causes of Market Failure
4. The Underproduction of Merit Goods
A merit good is a private good that
society believes is under-consumed, often
with positive externalities. For example
education, healthcare, and sports centers.
Causes of Market Failure
5. Overprovision of Demerit Goods
A demerit good is a private good that
society believes is over consumed, often
with negative externalities. For example
cigarettes, alcohol, and prostitution
Causes of Market Failure
6. Abuse of Monopoly Power
Imperfect markets restrict output in
an attempt to maximize profit.
Government Interventions for the
Market Failure
1. Legislation
- enacting specific laws.
Government Interventions for the
Market Failure
2. Direct provision of merit and public goods
– government controls the supply of
goods that have positive externalities. For
example, by supplying high amounts of
education, parks, or libraries.
Government Interventions for the
Market Failure
3. Taxation
– placing taxes on certain goods to
discourage use and internalize external
costs. For example, placing a ‘sin tax’ on
tobacco products, and subsequently
increasing
the
cost
of
tobacco
consumption.
Government Interventions for the
Market Failure
4. Subsidies
– reducing the price of a good based
on the public benefit that is gained.
Government Interventions for the
Market Failure
5. Tradable permits
– permits that allow firms to produce
a certain amount of something,
commonly pollution.
Government Interventions for the
Market Failure
6. Extension of property rights
– creates privatization for certain
non-private goods like lakes, rivers, and
beaches to create a market for pollution.
Then, individuals get fined for polluting
certain areas.
Government Interventions for the
Market Failure
8. International cooperation among governments
– governments work together on issues
that affect the future of the environment.