Firms, production, Firm's costs, revenue, and objectives(Chapter 17/18) Flashcards
How production adds value to resources?
Goods and services are provided to satisfy consumer wants and needs. The production of goods and services is organized by entrepreneurs in firms. A firm combines inputs to make goods and services to then produce outputs, the productive activity adds value to those resources. A firm may own one or more plants(A workplace) where resources are employed and productive activity carried out. Value added in production is the extra value created when a product’s market price is higher than the cost of materials, tools, and equipment used to make it. It includes the wages paid to workers involved in production and the profit earned by the firm.
Specialization in production by firms
Specialization means a firm can make the best possible use of all the skills and resources. A firm that specializes in the production of just one product could fail if there is a fall in demand for its product. Some firms therefore produce a range of different products in case consumer demand for any one of them falls. This is called diversification.
What is factor productivity
Productivity measures the amount of output (goods and services) that can be produced from a given amount of input (land, labour and capital resources).
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.
How to measure productivity
How efficient workers are:
Average product of labor = total output per period / number of employees
Overall productivity:
Average revenue product of labor = total revenue per period / number of employees
How can firms increase factor productivity
- Training workers to improve their existing skills and learning new skill’s.
- Rewarding increased productivity with performance-related pay and bonus payments.
- Encouraging employees to buy shares in their organization (improved productivity will help to raise profits and pay higher dividends on shares).
- Increasing job satisfaction, introducing more team working, involving workers in business decision making and giving regular feedback on performance.
- Replacing old plant and machinery with new, more efficient machines and tools for workers to use.
- Introducing new production processes and working practices designed to continually reduce waste, increase speed, improve quality and raise output in all areas of a firm. This is known as lean production.
Labor-intensive production definition
Labor-intensive production is common in many service industries and also in the agricultural sector where capital-intensive methods are not feasible. Many delicate fruits and vegetables are carefully hand-picked on farms to avoid bruising or damaging the crops. Some goods may also be handmade by workers using handheld tools to produce more personalized or customized items.
Capital-intensive production definition
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. However, total costs may initially be high because specialized machinery and other capital equipment can be expensive to hire or purchase.
Labor-intensive and Capital-intensive production advantages
Capital-intensive
-Can be mass produced
-Mass production will reduce the avg costs for producing
-Wages and other labor employment costs are much lower
-Less risk of disruption to production from shortages of labor or from industrial disputes.
-Continuous, 24/7
-Less risk of human error, and product quality will be more uniform.
Labor-intensive
-Consumers may pay a premium price for handmade/personalized products
-Labor costs can be kept low if workers are unskilled or temporary(eg. picking crops during summer)
-Less risk of losses due to machinery breakdowns/power cuts
-Workers may take more pride in their work and produce better quality products compared to repetitive machinery tasks.
-Labor can be used more flexibly than immobile machinery
-Product quality is easier to observe/monitor/change.
Labor-intensive and Capital-intensive production disadvantages
Capital-intensive
-Capital can be pricey
-Maintenance costs can be high/increase over time
-Training costs may be high, if workers need to be trained how to use complex equipment
-Can be difficult to change production(eg. technology change, it will be expensive to upgrade and meet consumer demands)
-Breakdown/power cuts will slow down production
-Not suitable for service industry(where more personalized products are needed)
Labor-intensive
-Wages/employment costs can be high
-Can be difficult to find/hire workers with the skills they need and may have to pay higher wages to attract skilled labor
-Disputes with trade unions/ 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 than in firms using more capital-intensive methods
-Labor-intensive methods are best suited to small-scale production/ personalized goods
What determines demand for FOP
- Consumer demand for their product - The more goods and services consumer want and are wiling and able to buy the more FOP firms will need to produce them
- Factor prices - The demand for FOP by firms will depend on their market prices. The higher their prices the more costly it will depend on their market prices.
- Factor availability - Factor availability will affect both the price and quantity supplies for different FOP.
- Factor productivity - A profit-maximizing firm will only employ addition FOP if it is profitable to do so.
Factor substitution
Factor substitution refers to the process of replacing labor with capital equipment and machinery in production, driven by technological advancements that lower costs and increase productivity. However, the extent of substitution depends on the type of product and production process, as certain industries and services still require personalized care and craftsmanship that cannot be replicated by machines.
Fixed costs
Fixed costs are expenses that a firm incurs regardless of the level of output or production, such as rent, interest charges, and insurance premiums. These costs remain constant in the short run but may increase if the firm needs to expand its capacity to accommodate higher production levels.
Variable costs
Variable costs are expenses that vary directly with the level of output or production. These costs include materials, component parts, labor wages, and energy consumption, and their total amount increases as the firm produces more goods or services.
total variable cost = variable cost per unit x quantity produced
Total cost = total fixed cost + total variable cost
Average costs
Average costs refer to the cost per unit of output or service provided by a firm. It is calculated by dividing the total cost by the total output, and it tends to decrease initially as production volume increases due to the spreading of fixed costs, but may eventually rise if output continues to increase beyond a certain point.
Average cost per unit = total cost / total output
definition of revenue
Revenue refers to the total income earned by a firm from selling its goods or services, calculated by multiplying the price per unit by the quantity sold. Average revenue per unit is the average price obtained for each unit sold, and it often decreases as output and sales increase due to the need to lower prices to attract more customers.
