Production & Business Organization
Lectured by: Sajawal Aslam
Production & Business Organization
• The relationship between the quantity of output (such as wheat,
steel, or automobiles) and the quantities of inputs (of labor, land, and
capital) is called the production function.
• Total product is the total output produced.
• Average product equals total output divided by the total quantity of
inputs.
Marginal Product Is Derived from
Total Product
Production & Business Organization
• According to the Law of diminishing marginal returns,
the marginal product of each input will generally
decline as the amount of that input increases, when all
other inputs are held constant.
OR
As you add variable resources to fixed resources the
additional output will eventually decrease. This shows
Law of Diminishing Marginal Returns
Total Product, Marginal Product & Average
Product
Economies of Scale
• Economies of scale are when a company lowers the per-unit cost of production while
increasing production volume. Economies of scale can increase a companies
Efficiency and Profit .
Internal Economies of Scale- Companies can achieve internal
economies of scales by making improvements internally.
Example; using unskilled labors, provide training and development etc
External Economies of Scale- When an outside force improves the
scale for the entire industry.
For example; Tax break, government loans etc
Diseconomies of Scale
• Diseconomies of Scale: As companies get larger and grow more
complex, they can experience higher costs and Diseconomies of
Scale. This can occur when managing a larger company becomes
challenging ( Leading to poor communication between employees
and manager )
Returns to Scale
• The returns to scale reflect the impact on output of a balanced increase in all
inputs.
• A technology in which doubling all inputs leads to an exact doubling of outputs
displays constant returns to scale. For Example (Hair Cutting Saloons)
• When doubling inputs leads to less than double (more than double) the
quantity of output, the situation is one of decreasing (increasing) returns to
scale.
For Example: For increasing of machinery increase output.
For Decreasing manufacturing plant reduce production because
of threat of shutdown
Production & Business Organization
• Short Run
Short run is a period in which firms can adjust production by changing
variable factors such as materials and labor but cannot change fixed
factors such as Capital.
• Long Run
Long run is a period in which all factors employed by the firms,
including capital can be changed.
Production & Business Organization
• Technological change refers to a change in the underlying techniques
of production, as occurs when a new product or process of
production is invented or an old product or process is improved. In
such situations, the same output is produced with fewer inputs or
more output is produced with the same inputs.
• Technological change shifts the production function upward.
Technological Change Shifts Production Function
Upward
Business Organizations
• Business firms are specialized organizations devoted to managing the
process of production
• Types of Business Organization
• There are three types of business organization:
Proprietorship
Partnership
Corporation
Proprietorship
• A proprietorship is a firm with a single owner who has unlimited liability, or
legal responsibility for all debts incurred by the firm—up to an amount equal
to the entire wealth of the owner.
• The proprietor also makes management decisions and receives the firm’s
profit.
• Profits are taxed the same as the owner’s other income.
Partnership
• A partnership is a firm with two or more owners who have unlimited liability.
• Partners must agree on a management structure and how to divide up the
profits.
• Profits from partnerships are taxed as the personal income of the owners.
Corporation
• A corporation is owned by one or more stockholders with limited liability,
which means the owners who have legal liability only for the initial value of
their investment.
• The personal wealth of the stockholders is not at risk if the firm goes
bankrupt.
• The profit of corporations is taxed twice—once as a corporate tax on firm
profits, and then again as income taxes paid by stockholders receiving their
after-tax profits distributed as dividends.
Pros and Cons of types of firms
Thank You