Unit 4.2 and 4.3 - Organization of Production and Growth of Firms Flashcards
Production
A form combining scarce resources of land, labor, capital and enterprise (inputs) to create and sell goods and services (outputs)
Value Added
Difference between the market price paid for a product by the consumer and the cost of the natural and man made resources used to make it.
Specialization
- Each worker works in a field they are good at
- Firm can make best possible use of skills and resources it has and therefore add much more value to them.
Industrial Sector
- A group of firms specializing in similar goods or services, or using similar production processes.
Primary Sector
- Specialize in the production and extraction of natural resources.
Secondary Sector
- Turn unprocessed natural resources and other unfinished products into other goods
Tertiary Sector
- Provide services or labor.
Productivity
- The amount of output (goods and services) that can be produced from a given amount of input (land, labor and capital resources)
- Measures how efficiently resources are being used in production.
- Increases if more output or revenue is produced from the same amount of resources, or, if the same output can be produced using fewer resources.
- Increasing Productivity can reduce costs - increasing profits
Formula for productivity of labor:
Total output per period/number of employees
Division of Labor
- Where each worker specializes in carrying out one particular task or operation in the production process.
Pros:
- More goods and services can be produced
- Time is saved
- Full use is made of the employees’ abilities
Cons:
- Work may become boring (Repetitive)
- Products are too standardized
- Workers may feel alienated
Improving Productivity
- Training Workers
- Rewarding Increased Productivity
- Encouraging employees to buy shares in the company
- Increasing Job Satisfaction
- More efficient machines and tools
- Lean Manufacturing
Labor/Capital intensive
Spends more money/effort on workers/machinery.
Determined by:
- Demand
- Cost of labor and capital
- Producitivity of said labor and capital
Factor Substitution
- Replacing labor in a production process with new capital equipment and machinery, because of technological advances.
- Depends on context and industry
Fixed Costs
- Costs of production that do not vary with the level of output.
- Eg: Mortgage, Rents, Interest on Loans, salaries
Variable Costs
- Costs that are directly proportionate to the level of output.
- Eg: Electricity to power machines, wages
- Total Variable Cost = variable cost per unit x number of units produced
Total Costs
- Total amount it costs to produce a certain amount of a good or service
- Fixed costs + output*variable costs = total costs
- If there is no output, TC = FC
Average Cost
- Total Cost/Total output
- Forms a curve (typically decreased because FC is spread out over more units, but diseconomies of scale also factor in)
Revenue
- The total amount of money a firm gets for all the products sold.
- Price x Quantity
- Aka Turnover
Profit/Loss
- Revenue - Total Costs
- Positive = Profit
- Negative = Loss
- 0 = No gain or loss
Measuring the size of firms
- Number of Employees
(Large > 50) - Organization
(Large = Divided into departments)
-Capital Investment
(Large = Higher invetsment)
- Market Share
(Large = High market share)
Internal Growth
- aka Organic Growth
- Involves a firm expanding its scale of production through purchase of new equipment, increasing the size of its premises, and hiring more labor if needed.
Integration
- Type of External Growth
- Horizontal = 2 firms at the same level of production and sector of industry
- Vertical = 2 firms at the same industry but differnet levels (Forward = closer to retail, Backward = farther from retail)
- Lateral = 2 firms at the same or different levels in different industries
Merger
- Type of External Growth
- when the owners of one or more firms agree to join together to form a new, larger enterprise
Acquisition
- Type of External Growth
- when one company buys enough shares in the ownership of another so it can take overall control.
Economies of Scale
- When a firm expands the scale of production it has the chance to become more efficient and lower its average cost of production, the benefits enjoyed by having a larger scale.
Internal Economies
- the advantages brought by decisions taken within a firm due to an increase in size. They are the cost savings that result from large-scale production.
Purchasing Economies
- Suppliers will often offer discounts for bulk purchases because it is cheaper for them to make a larger delivery than multiple smaller ones.
Marketing Economies
- Large businesses may buy or hire their own vehicles to distribute their goods and services, so it does not have to pay the profit margins of other firms.
- Fixed costs of advertising in newspapers or on television will be spread over a much larger output.
Financial Economies
- Larger firms can often borrow more money and at lower interest rates than smaller businesses.
- Lending to big organizations is less risky than smaller organizations because they are more financially secure.
