Organisation of Production Flashcards
What is an industrial sector or industry?
An industrial sector or industry is a group of firms specializing in similar goods and services, or using similar production processes. There are three main types of industry:
- Primary (extraction/production of natural resources)
- Secondary (manufacturing and construction)
- Tertiary (services)
There is a fourth type of industry: quatenary (involving research)
What is profit?
Profit is a surplus of revenue over costs. It is reward for enterprise and risk taking. Without it people would not start up and own business organizations.
Profit = total revenue - total cost
Most private sector firms aim for profit maximisation.
What organisations are there that do not aim to maximise profits?
- charities
- not-profit-organisations (which use the surplus of revenue to re-invest in the business or lower prices)
- public sector organisations (funded by tax provisions)
What is productivity?
Productivity is a measure of the amount of output that caan be produced per unit of input.
How do you calculate average productivity of labour?
total output per period / number of employees
However, it is difficult to measure the output of business organisatoins producing services.
How do you calculate the average revenue product of labour?
total revenue per period / number of employees
This is a better mesure of overall productivity, especially as some workers do different jobs and their output cannot be well compared.
What are the advantages of the division of labour?
- more goods and services can be produced
- full use is made of employees’ abilities
- time is saved
- it allows the use of machinery
What are the disadvantages of the division of labour?
- work may become boring
- workers may feel alienated
- products become too standardised due to mass production
What is value added?
This is the difference between the market price paid for a product by a consumer and the cost of the natural and man-made materials, components and resources used to make it.
Value added = profit + wages
How can firms increase productivity other than using the division of labour?
- train workers to improve skills and learn new skills
- reward increased productivity
- encourage employess to buy their shares
- increase job satisfaction, e.g. by improving working environment, team working, giving feedback, involving workers in business decisions
- replace old machinery with new, more efficient machines and tools for the workers to use
- introduce new production processes and working practices to reduce waste, increase speed, improve quality and raise output. This is known as lean manufacturing.
What factors affect the amount of labour or capital demanded by a firm?
- The amount of goods and services consumers demand (demand for factors of production is a derived demand)
- The market prices of labour and capital
- The productivity of labour and capital
Define
Factor substitution
Replacing one factor of production with another in a production process, for example, to make production more capital intensive.
Define
fixed costs
Costs of production that do not vary with the level of output in a firm.
For example: insurance, rent, electricity bill, telephone line rental
Define
variable costs
Costs of production that vary directly with the level of output, such as the cost of materials and components.
total variable cost = total output x variable cost per unit
Define
average cost
The cost per unit of output produced, which tends to fall as output is increase as fixed costs remain unchanged. However, after a point, average costs may start to rise again if it becomes more difficult and expensive to increase output.
average cost = total cost / total output
