Production, productivity, and specialisation

Purpose of business activity

To produce goods or services that satisfy customer needs/wants

How is business activity achieved?

Through production

Production - defintion

Converts inputs (factors of production) into a final output

This is done by adding value to the raw materials by combining inputs in a way that customers find useful, and so will pay more for it.

3 types of production

Primary - agriculture

Secondary - manufacturing

Tertiary - services

Productivity

measure of the efficiency with which inputs are transformed into outputs

3 types of productivity

Labour - output per worker over period of time - total output / no of workers

Capital - Output per unit of capital

Factors - average output of all factors of production

Why is productivity important?

1. Lowers costs, improving firms’ competitiveness

2. Firms can produce more output with same input, generating economies of scale

3. Higher profits, so can pay workers more and improve standards of living. Also increases gov revenue through taxes

4. Ability to compete internationally will generate economic growth

Productive efficiency - definition

Where no additional output can be produced from the factor inputs available at the lowest average cost

Average total cost equation

Total cost/output

How does average total cost change with output?

Economy of scale - As output inceases, costs per unit falls due to fixed costs being spread over a higher output

Diseconomy of scale - unit costs rise as output increases

What is point Q in this graph?

Minimum Efficient Scale (MES) - productive efficiency point where average total costs are lowest.

How can productivity be increased?

Training of workers or use of more advanced machinery.

What are the 4 functions of money?

1. Medium of exchange

2. A measure of value

3. A store of value'

4. A method of deferred payment

1. Medium of exchange - explanation

Before money, goods and services were traded through bartering, however people did not always get what they wanted, and goods weren’t always of equal value, money eliminates this issue.

1. A measure of value - explanation

Provides a means to measure the relative values of different goods and services, ie jewellery is more valuable than a table as it has a higher price.

Also puts value on labour

A store of value - explanation

Money has to hold its value to be used for payment, it can be kept a long time without expiring

However, the quantity of goods/services that can be bought fluctuates with market forces.

A method of deferred payment - explanation

Money can allow for debts to be created, people can therefore pay for things without having the money in the present, but will in the future, relies on money storing its value

Division of labour - definition

Production process is broken down into many smaller separate tasks

Advantages of division of labour

1. Improved labour productivity

2. Increases profits due to economies of scale - higher productivity = higher output = costs per unit falling = higher profitability

Why does division of labour increase efficiency/ productivity?

Due to the idea of learning by doing - acquiring expertise through practice, and so engaging in repetitive tasks leads to an increase in proficiency and output/worker.

Disadvantages of division of labour

1. Reduced job sastisfaction due to the job being boring/ unrewarding - hampers productivity leading to workplace absenteeism - higher costs in hiring/ training new staff

2. Risks of repetitive strain injuries

3. Structural unemployment - may struggle to find other jobs when out of work, as only good at one thing

Specialisation - definition

Individuals, firms or regions concentrating their efforts on producing a narrow range of goods and services in which they have a comparative advantage

Comparative advantage - definition

Countries, individuals or firms should focus on goods or services in which they are relatively more efficient in comparison to others