Unit 4.2 and 4.3 - Organization of Production and Growth of Firms

Question 1

Production

Answer 1

A form combining scarce resources of land, labor, capital and enterprise (inputs) to create and sell goods and services (outputs)

Question 2

Value Added

Answer 2

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.

Question 3

Specialization

Answer 3

• 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.

Question 4

Industrial Sector

Answer 4

• A group of firms specializing in similar goods or services, or using similar production processes.

Question 5

Primary Sector

Answer 5

• Specialize in the production and extraction of natural resources.

Question 6

Secondary Sector

Answer 6

• Turn unprocessed natural resources and other unfinished products into other goods

Question 7

Tertiary Sector

Answer 7

• Provide services or labor.

Question 8

Productivity

Answer 8

• 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

Question 9

Division of Labor

Answer 9

• 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

Question 10

Improving Productivity

Answer 10

• Training Workers
• Rewarding Increased Productivity
• Encouraging employees to buy shares in the company
• Increasing Job Satisfaction
• More efficient machines and tools
• Lean Manufacturing

Question 11

Labor/Capital intensive

Answer 11

Spends more money/effort on workers/machinery.

Determined by:

• Demand
• Cost of labor and capital
• Producitivity of said labor and capital

Question 12

Factor Substitution

Answer 12

• Replacing labor in a production process with new capital equipment and machinery, because of technological advances.
• Depends on context and industry

Question 13

Fixed Costs

Answer 13

• Costs of production that do not vary with the level of output.
• Eg: Mortgage, Rents, Interest on Loans, salaries

Question 14

Variable Costs

Answer 14

• 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

Question 15

Total Costs

Answer 15

• 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

Question 16

Average Cost

Answer 16

• Total Cost/Total output
• Forms a curve (typically decreased because FC is spread out over more units, but diseconomies of scale also factor in)

Question 17

Revenue

Answer 17

• The total amount of money a firm gets for all the products sold.
• Price x Quantity
• Aka Turnover

Question 18

Profit/Loss

Answer 18

• Revenue - Total Costs
• Positive = Profit
• Negative = Loss
• 0 = No gain or loss

Question 19

Measuring the size of firms

Answer 19

• Number of Employees
  (Large > 50)
• Organization
  (Large = Divided into departments)

-Capital Investment
(Large = Higher invetsment)

• Market Share
  (Large = High market share)

Question 20

Internal Growth

Answer 20

• 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.

Question 21

Integration

Answer 21

• 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

Question 22

Merger

Answer 22

• Type of External Growth

- when the owners of one or more firms agree to join together to form a new, larger enterprise

Question 23

Acquisition

Answer 23

• Type of External Growth

- when one company buys enough shares in the ownership of another so it can take overall control.

Question 24

Economies of Scale

Answer 24

• 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.

Question 25

Internal Economies

Answer 25

• 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.

Question 26

Purchasing Economies

Answer 26

• Suppliers will often offer discounts for bulk purchases because it is cheaper for them to make a larger delivery than multiple smaller ones.

Question 27

Marketing Economies

Answer 27

• 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.

Question 28

Financial Economies

Answer 28

• 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.