The Market System & Business Economics ( ch. 13-16)

Some production activities may end up in costs incurred by third parties (mainly society). External costs are negative spillover effects of consumption or production, which affect third parties in a negative way. These may be external benefits - positive spillover effects of consumption or production, which bring positive benefits to third parties.

External benefits:

  • Education (External benefits) - productivity and standard of living both rise
  • Healthcare (External benefits) - work more effectively, make more contributions to economic output
  • Vaccinations (External benefits) - likeliness of others getting disease lower, increasing output as more people can work

External costs:

  • resource depletion
  • noise pollution
  • air pollution
  • water pollution
  • overcrowding
  • traffic congestion

Private costs are the costs of economic activity to individual firms, contrasting with social costs, which are the costs of economic activity to society as well as the individual or firm. Private benefits are the rewards to third parties of economic activity such as consumption or production, and social benefits are the benefits of economic activity to society as well as the individual or firm. For a government to remove any negative externalities, they can implement these measures:

  • Taxation - remove external costs of production
  • Subsidies - governments can offer money to firms as an incentive to reduce external costs
  • Fines - these can be used to reduce external costs as a deterrent
  • Government regulation - legislation can be passed to protect the environment, thus reducing any external costs
  • Pollution permits - these can be granted to firms

Business Economics:

The Factors of Production (FoP) are resources used to produce goods and services, are comprised of capital, enterprise, land and labour. Production is defined as the process involving converting resources into goods or services.

Capital:

  • two types of capital:
    • working capital or circulating capital - resources used up in production such as raw materials and components
    • fixed capital - stock of man-made resources such as machines and tools used to help make goods and services
  • an economy might be capital-intensive (an economy that relies more heavily on machinery, relative to labour)

Enterprise:

  • entrepreneurs (individuals who organize the other factors of production and risk their money in a business venture) have the job of:
    • they come up with a business idea
    • business owners
    • risk-takers
    • organization of the factors of production

Land:

  • some resources are non-renewable, meaning that they cannot be reused

Labour:

  • workforce of the economy, comp[rising of a firm’s human capital (value of workforce or of an individual worker)
  • an economy might be labour-intensive (production relying more heavily on labour, relative to machinery)

The primary sector is the production involving the extraction of raw materials from the earth. Industries:

  • agriculture
  • fishing
  • forestry
  • mining and quarrying

The secondary sector is the production involving the processing of war materials into finished and semi-finished goods. This may be at assembly plants, where parts are put together to make a product.

The tertiary sector is the production of services in an economy. Industries:

  • commercial services such as freight delivery
  • financial services such as banking
  • household services such as plumbing
  • leisure services such as television
  • professional services such as legal advice
  • transport services such as trains and taxis

Over the last 60 years, deindustrialization (decline in manufacturing) has become a lot more common, with the tertiary sector expanding greatly. This happens because:

  • people prefer to spend income on services
  • fierce competition in the production of manufactured goods
  • as countries develop, their public sector grows, adding to the growth of the tertiary sector
  • advances in technology mean that machines replace people

In a developed country, there is a much larger primary sector, and secondary sector, whereas the developed nations mainly focus on things in the tertiary sector such as tourism.

Businesses can increase output if productivity can be raised. Productivity is the rate at which goods are produced and the amount produced in relation to the work, time and money needed to produce them. This can be found in the output per worker calculation.

Factors affecting productivity:

  • land affecting productivity - the quality of land varies, so fertilisers, pesticides, reclamation, genetically modified crops, drainage and irrigation are very important
  • labour affecting productivity - the quality of human capital is important, so training, motivation, improved working practices and migration are very important
  • capitol affecting productivity - improvements in productivity can mean that there are new technologies introduced, so in the primary sector, machinery can increase output and reduce waste. In the secondary sector, new technology has led to better lines of production, increasing output, and in the tertiary sector, there has been a huge growth in the e-commerce industry

Division of labour is the breaking down of the production process into small parts with each worker being allocated a specific task. Specialisation is the production of a limited range of goods by individuals, firms, regions or countries. This is helpful because it increases efficiency in the economy.

Advantages of the division of labour (workers):

  • focusing on one task allows to increased skill
  • high skill means higher pay
  • more job satisfaction with higher skills

Disadvantages of the division of labour (workers):

  • boring and repetitive work
    • especially with little skill required
  • work of unemployment
  • can have health implications (ie joint wear)
  • job dissatisfaction

Advantages of the division of labour (firms):

  • efficiency improved
  • more specialist tools are possible
  • production time reduced
  • organisation easier

Disadvantages of the division of labour (firms):

  • poor-quality work with unmotivated workers
  • problems occurring at one stage affect the whole production line
  • loss of flexibility in the workspace

Costs are expenses that must be met when getting up and running a business. Fixed costs are costs that don’t vary with levels of output, such as rent. Variable costs are costs that change when output levels change, such as raw materials. The formula for average cost is average cost = total cost/quantity produced. You can plot a graph of average cost by using an average cost curve. The amount of money a firm received from selling its output is total revenue, which is found by multiplying the price of each unit by the units sold using the equation total revenue = price * quantity. We can calculate profit (the difference between total revenue and total costs) using the equation profit = total revenue - total costs.