ECONOMICS

Production and productivity

Goods and services are produced to satisfy consumer wants. The production
of goods and services is organized by entrepreneurs in firms. A firm
combines the factors of production land, labour and capital (inputs) to make
goods and services (outputs). Goods and services are produced to satisfy
consumer wants.

A firm may own one or more plants where resources are employed and
productive activity is carried out. A plant is simply a workplace and includes
premises such as a warehouse, retail outlet, office or factory.

Specialization in production by firms

Specialization means a firm can make the best possible use of all the skills
and resources it has and therefore add much value to them.
Some firms therefore produce a range of different product in case consumer
demand for any one of them [Link] is called diversification.

Because firms specialize in particular activities, production will normally

involve a chain of productive activity. Each chain of productive activity
will link together many different firms,industries and industrial sectors.

What is factor producitivity

Productivity measures the amount of output ( goods and services) that can
be produced from a given amount of input ( Land, Labour and capital
resources). Increasing the productivity of resources can reduce production
cost, make a firm more competitive,and increase profits. For example,a
business that uses 10 units of resources to produce 40 units of output per
week is twice as productive as a business that uses 10 units of the same
resources to produce just 20 units of output per week.

Productivity therefore measures how efficiently resources are being used in

production.
In general, productivity in a firm or entire economy will have increased if:
.More output or revenue is produced from the same amount of
resources
.The same output or revenue can be produced using fewer
resources.

A firm that fails to increase productivity of its resources or factors of

production at the same pace or at a faster rate than rival firms will have
higher production cost and therefore lower profits than its competitors.
Measuring productivity
Labour productivity is the most common measure of factor
[Link] by dividing total output over a given period of time,
for example a day, week or month, by the number of workers employed. This
gives a measure of the average productivity per worker per period.

The average productivity of labour is a useful measure of how efficient

workers are and how efficiently they use other resources. For example, if a
company employs 10 workers who produce 200 plant pots each day, the
average product per employee per day is 20 pots. It daily output is able to
rise to 220 pots per day without employing additional workers then
productivity will have increased to 22 pots per worker per day.

Productivity in business organizations producing services can be more

difficult to measure. For example, a hair salon could measure the number of
customers or hair treatments per day per employee, but not all employees in
the salon will be hairdressers.

A better measure of overall productivity is the average revenue per worker

per period.

How can firms increase productivity?

.Training workers to improve their existing skills and learn new skills
.Rewarding increased productivity with performance-related pay and bonus
payments
.Encouraging employees to buy shares in their organization-
.Increasing job satisfaction
.Replacing old plant and machinery with new one
.Introducing new production processes and working practices

Labour intensive and capital intensive

Many modern firms employ capital-intensive production methods that
require far more capital input than labour. Capital-intensive production
processes are often partially or fully automated. They aim to mass-produce
similar or identical products faster and cheaper than workers could by hand .
Labour-intensive production is common in many service industries and also
in the agricultural sector where capital-intensive methods are not feasible.
For example, many hospitals, hotels, restaurants, supermarkets and other
retailers employ large workforces because they provide personalized
services

Advantages of capital intensive production.

.Products can be mass-produced if market size is large
.Mass production will reduce the average cost of producing each unit.
.Wages and labour employment cost are far lower.
.Less risk of disruption to production from shortages of labour
.Automatded production can be continuos (24 hours a day)
.Programmed equipment cannot lose skills or concentration.(less risk of
human error)

Disadvantages of capital intensive production

.Machinery and capital equipment may be expensive to buy or hire>
.Maintenance cost can be high
.Training cost can be high if workers need to be trained to operate complex
equipment
.It may be difficult to change production
.Technological advance is increasing the rate at which machines and other
equipment need to be replaced to remain competitive.
.Breakdowns or power cuts will hold up production
.its not suitable in markets where consumers want custom-made products

Advantages of labour intensive production

.Consumers may pay for a premium price for hand made and customized
products
.Labour cost can be kept low if workers are unskilled or hired on temporary
contracts
(ex:to pick crops during summer)
.Lower risk of losses due to machinery breakdown or power cuts halting
production
.Workers may take more pride in their work and produce better quality
products
.Labour can be used more flexibly than installed and therefore immobile
machinery
.Product quality is easier to observe,monitor and change at each stage of the
production process

Disadvantage of labour intensive production

.Wages and employment cost can be high
.Difficult to find and hire workers with the skills they need and may have to
pay higher wages to attract skilled labour
.Disputes with trade unions and workers can result in industrial actions which
can disrupt production
.Workers may need to be retrained in new skills and production methods as
consumer demand changes.
.The average cost of producing each item will be much higher
.Labour-intensive methods are best suited to small production or customized
products

What determines the demands for factors of production

.Consumer demand for their products
.Factor prices
.Factor availability
.Factor producitivity

Factor substitution
.Involves replacing labour in a production process with new capital
equipment and machinery.
.computer aided manufacture(CAM)

Definition & calculation of cost of production

Cost of production- The cost of production refers to the total expenses
incurred by a business in the process of manufacturing a product or
providing a service.
It encompasses all expenses involved in acquiring raw materials, labor,
equipment, utilities, rent, and any other resources necessary for production.

Fixed cost-cost that do not vary with the level of output.(mortgage

payments,rents,interest charges on bank loans,charges for
machinery,telephone bills,cleaning cost and etc will be continued to be paid
once productions has started no matter how much a firn produces and sells.

Variable cost-cost that vary directly with the level of output. The more a firm
produces and sells a product,the more they have to pay for the materials
(fabric,foam,wages)

Total variable cost=variable cost per unit x quantitiy produced

Total cost=total fixed cost + total variable cost

If a firm produces no goods or services its total costs will be equal to its total
fixed costs. Adding total variable costs to fixed costs means total costs will
also increase as output rises, so the total cost curve will be upward sloping.
In our car firm the total cost of producing no cars will therefore be the fixed
costs it will have to continue paying for at $10 million per month, while the
total cost of producing 10,000 cars each month will be $30 million of fixed
costs plus variable costs.

Average fixed cost= total fixed cost.

--------------------
Total output
Average variable cost=total variable cost
-------------------------
Total output

Average cost per unit = total cost

-------------
Total output

Definition and calculation of revenue

Total revenue- is the total amount sold multiplied by the price per unit sold

Total revenue=price per unit x quantity sold

Profit and loss
Profit or loss is calculated as the difference between total revenue and total
cost at each level of output, that is:

Profit (or loss) = total revenue – total cost

Profit (or loss) per unit = average revenue – average cost

Break even
-even the level of output,which if sold,will generate a total revenue that will
exactly equal total cost.

Total revenue-total cost=0 or total revenue= total cost

Objective of firms
[Link]

Why is profit important?

.necessary reward for risk-taking
.provide a source of finance for a firm
.measure of success and financial stability

[Link]
Benefits of growth
. lower average cost due to economies of scale
.increased shares and market share
.the ability to diversify into different products and markets to reduce market
risk
.improved chances of survival

[Link]
-starting and running a new firm can be difficult, Set-up cost can be
high,consumer tastes and spending patterns can change quickly and
competition from larger businesses can be fierce, Many new firms close
within their first year of operation, Survival is therefore oftene the most
important objective for newly created firms.

[Link] welfare and environmental objectives

.social objectives: to support the most disadvantaged people in
society,including the poor ,the sick, and the disabled
.environmental objectives:to protect the natural environment,oceans and
wildlife
Financial objectives:to earn a surplus of revenue over cost that can be
reinvested back into the firm to improve or expand its social or
environmental work.