Production (section 2)

Production

The use of resources to produce goods and provide services for consumption

Activities involved in the production process

Manufacturing of goods, distribution of goods produced, providing services

Factors of production/resources

The inputs used in the production of goods and provision of services

Factor rewards/factor income

A form of compensation to the owners of the factors of production so that the factors of production can be employed

Land

All the natural resources on the planet which can be used in the production process

Labour

The effort made by workers in the production process

Occupational mobility

The movement of labour from one occupation to another

Geographical mobility

The movement of labour from one place to another either locally of to foreign countries

Division of labor

Means that each worker specializes in doing just one task

Productivity

Output per factor of production per period

Productivity formula

Total output/quantity of FOP

Labour productivity

Output per worker per period of time

Labour productivity formula

Total output/number of workers

Capital

All goods used to produce other goods and services

Capital formation

Refers to an increase in the amount of capital available for production

Enterprise/entrepreneurship

The acceptance of the risk of uncertainty in the creation of goods and services or the factor of production responsible for organizing the other three factors of production (the role of the entrepreneur)

Total product

The output of all goods and services produced or provided by a firm in a given time period

Average product

The amount of a good or service produced per factor of production

Marginal product

The change in total product that results from an employment of one more unit of a factor of production

Average product formula

Total product/number of factors of production

Marginal product formula

Change in total product/change in factor of production employed

Short run

A period of time in which one FOP is fixed and output may only be increased by employing more units of the variable FOP

Long run

A period of time over which the firm is able to employ increased amounts of all FOP

The law of diminishing returns

States that is increasing quantities of a variable input are applied to a given quantity of a fixed input, the marginal product and the average product of the variable input would eventually decrease

Total cost

The cost of all the resources used in the production of a particular level of output or the cost of producing the good or service

Fixed/indirect/overhead/unavoidable cost

These costs do not change with changes in output

Variable cost

These costs vary directly with output

Total cost formula

Total fixed cost + total variable cost

Average cost

The cost of producing a single unit of a good or service

Average cost formula

Total cost/output or average fixed cost + average variable cost

Average fixed cost

this gives the fixed cost per unit of output produced and decreases as output increases

Average fixed cost formula

Fixed cost/output

Average variable cost

This gives the variable cost per unit of output produced

Average variable cost formula

Variable cost/output

Marginal cost

Refers to the additional cost incurred as a result of producing one more unit of output

Economies of scale

The cost savings that a firm can exploit by expanding its production in the long run / the effect of higher output on unit cost of production

Internal economies of scale

Arises from the growth of a firm itself from the use of its own resources

External economies of scale

These are economies of scale which are gained when a number of firms in one industry achieve cost savings due to expansions in the industry as a whole

Technical economies of scale

Ability of large scale businesses to make use of technology they are now able to purchase and employ which is not available to businesses which operate on a small scale, this allows them to increase production causing unit costs to fall and profits to increase

Commercial/marketing economies of scale

The high volume of output produced by a large firm will make expenditure on marketing and advertising more economical as cost is spread over a larger number of units of output, unit costs decrease

Managerial economies of scale

Large scale firms may be able to employ specialists for different departments as well as capable managers which would result in improved productivity and reduced cost of production

Financial economies of scale

Large firms may have higher credit ratings than small firms which would enable them to larger firms to obtain loans and other financing at lower interest rates

Diseconomies of scale

Occurs when the site of a business becomes so large that rather than decreasing the cost of production, average cost actually increases

Reasons for diseconomies of scale

Management and administrative problems, lack of cooperation/worker morale

Returns to scale

Concerned with the relationship between the quantity of input and the volume of output / describe how the output changes when all inputs (e.g., labor and capital) are increased proportionally

Returns to scale vs economies of scale

Returns to scale focuses on the input to output relationship whereas economies of scale is the output to average cost relationship

Economic system

Mechanism that is involved in the production, consumption and distribution of goods and services and answers the three basic economic questions

What are the three basic economic questions?

What goods and services should be produced with the limited available resources, how are the resources going to be used to produce these goods and services, who would be able to consume the goods and services produced

Allocative mechanisms

The economic systems which are employed to answer the three basic economic questions

Economic systems

Market/free/capitalist , command/planned/socialist, mixed, traditional/subsistence farming/bartering

The price system

the way prices act as signals in an economy to allocate resources, goods, and services and is a core feature of market economies

Types of business organizations

Sole proprietorship, partnership, private joint stock company, public joint stock company, cooperative, multinational corporation

Sole proprietorship

A business owned and controlled by a single person

Cottage industry

An industry based in the home

Features of a sole proprietorship

Usually small, easy to establish as little capital is needed, easy to operate, often started in the home

Partnership

A business owned by two or more persons and each partner can conduct business on behalf of the other

Features of a partnership

Partners provide financial capital needed, partners share profits and losses, partners bear liabilities for debts incurred by the business, partners need to register the business with the Registrar of Companies

General partner

Responsible for the running of the business and has unlimited liability with respect to debts of a business

Limited partner

Has no personal responsibilities for the debts of the business, if the business is liquidated his responsibility in respect of payment of debts is only up to the amount he invested

Joint stock/limited companies

Companies owned by a number of individuals who have purchased shares in the company/company stock

Shareholder

an individual or institution that owns shares (stocks) in a company

Stakeholder

anyone who has an interest in or is affected by the activities of a company or organization, this includes shareholders, employees, customers, suppliers, government agencies, communities, and the environment

Private joint stock/limited company

A business with 50 or fewer shareholders

Features of a private joint stock/limited company

Business is a distinct entity separate from its owners in the eyes of the law, company must be registered with the Registrar of Companies and the business name must include ‘Ltd’, minimum of 2 and maximum of 50 shareholders, company’s accounts must be managed by an established auditor and accounting records properly kept (prevents money laundering), company had limited liability

Public joint stock company

A company with a minimum of 7 shareholders and the business is separate from shareholders

Features of a public joint stock/limited company

Funding for the business comes through banks and other financial institutions or through the sale of stocks and shares to the public on the stock exchange, members of the public purchase shares, no maximum limit to the number of investors

Cooperative

An enterprise that is jointly owned and controlled by a group of people who have set up the enterprise to meet their economic needs for example, agricultural cooperatives, credit unions, consumer cooperatives

Features of cooperatives

Membership is voluntary, they are democratic, there is a limit on the percentage of shares a single member can hold, surplus is used to develop the cooperative, members purchase shares

Multinational corporation

A firm that owns and operates production units or sales outlets in a number of foreign countries

Parent company of a MNC

The main company and a legal entity that owns or controls one or more subsidiary companies, it has significant control over the subsidiaries, including making major decisions regarding their operations, strategy, and governance

Home country of a MNC

The country where the MNC is based and where its headquarters are located

Headquarters of a MNC

the physical location (building or office) where the central management and executive leadership of the company are based, it is the primary operational center where key decisions regarding the company’s global strategy, operations, and management are made

Transnational corporations

Very large MNCs

Features of MNCs

They invest heavily in the primary and secondary sectors of host countries, they invest in developing countries, parent company has the controlling share in subsidiaries, they are private firms and profit seeking organizations, they are neither aid or development agencies and their actions result in benefits and costs to the host country

Subsidiaries

companies that are either wholly or partially owned by the parent company, which operates in a different country or region and these are often established to help the MNC expand its operations, gain access to local markets, and comply with local regulations