IGCSE Economics

4.2 Organisation of Production

Learning Outcomes

• Describe what determines the demand for factors of production

• Distinguish between labour-intensive and capital intensive production

• Define productivity• Recognise the difference between production and

productivity• Describe the principle of profit maximisation as a

goal and recognise that business organisations may have different goals

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Goods and services are produced to satisfy consumers’ needs and wants

The production of goods and services is organized by entrepreneurs in firms

A firm combines land, labour and capital (inputs) to make goods and services (outputs)

What is Production?

Adding Value

• Production adds value to resources by turning them into goods and services consumers want and are able to buy.

Value added: 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 = Selling Price – Cost of production

Chains of ProductionAs businesses tend to specialise in a particular type of activity, a product will go through a Chain of Production to reach the final consumer.Each business involved will Add Value

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ORGANISING PRODUCTION

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Most private sector firms aim to maximize 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.

Aims of Production

Profit = Total Revenue – Total Costs

Do businesses only want to make a profit? What other types of objectives might a business have?

Other Business Objectives…

• Survival• Increasing Market Share• Increasing Brand Loyalty• Improving Customer

Satisfaction• Environmental Objectives• Ethical Objectives• Innovation• Growth

What objectives might these businesses have other than profit maximisation?

Some Key Terms

Production Productivity

EfficiencyCompetitiveness

What do each of these terms mean? Can you explain any differences between them or links between them?

Efficiency, Productivity and Competitiveness

• Production is the total amount made by a business in a given time period.

• Efficiency is about making the best possible use of resources. Efficient firms maximise outputs from given inputs

• Productivity measures how much each employee (or other input) makes over a period of time.

• By improving efficiency and productivity a business can reduce its costs and improve its competitiveness.

Question

If the Cadbury factory increases it’s weekly production by 20,000 chocolate bars a week, does this mean it has increased productivity?

Labour productivity is the most commonly used measure of factor productivity.

Labour Productivity

Do businesses want each of these measures to increase or decrease?

A real example – Fiat-Chrysler in 2010

• In Italy, 22,000 Fiat workers spread across five assembly plants make about 650,000 cars a year.

• In Fiat’s huge Brazilian factory, just 9,400 workers turn out around 750,000 cars.

• At its Polish plant 6,100 workers turn out 600,000 cars.

• Chrysler has 50,000 workers in ten factories in America, Canada and Mexico turning out 1.6m cars.

For each calculate:1. Average product of labourCan you suggest an explanation for the differences?2. What other information would you need to be able to

work out the average labour cost per unit of each?3. Which do you think would have to lowest labour cost

per unit?

Task – Production Activity

In groups of 4 or 5 you will make boxes.You will decide within your groups how to organise your productionYou will see how many boxes you can produce in 5 minutesYou will then get a chance to review before having another 5 minutes to see if you can improve your productiviy

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Record your results in a table like this:

Key Questions

• How did your group organize production tasks?• What issues caused productivity to be low in the

first session?• Did your group manage to improve productivity

for the second session? How?• How could productivity be further improved?

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Factors Affecting Labour Productivity

Skill of Workers

Motivation of Workers

Availability of

Equipment

Production method

Quality of management

What could a business do to improve these following factors in order to improve labour productivity?

Same amount of inputs, same costs but more output = lower average cost per unit

The importance of Productivity

Why is it so important that firms reduce their average costs?

THE DIVISION OF LABOUR

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The Division of Labour

Increased labour productivity over time has been the result of the division of labour: each worker specializes in one particular task or operation in a production process

Task

Watch the video ‘The division of labour – Wilson Football factory’

What are the advantages and disadvantages of the division of labour?

Think about this from the perspectives of the workers, the business and customers

Advantages Disadvantages

• It makes best use of an employee’s abilities

• It reduces time spent by employees changing tasks

• It allows greater use of machinery

• It increases output

• Carrying out the same task again and again may become boring

• Workers may lack pride in their work because they do not see the final result of their efforts

• Products become too standardized through mass production

The division of labour

CAPITAL VS LABOUR INTENSIVE PRODUCTION

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Labour-intensive production

Capital-intensive production

Capital Intensive Vs Labour Intensive

What will determine whether a firm uses labour or capital intensive production?

Factors determining demand of capital and

labour• The nature of the task

• Mass market vs differentiation strategy

• how much output consumers demand

• the cost of labour relative to the cost of employing capital

• the productivity of labour relative to capital

What might make a business decide to substitute workers for machinery? (factor substitution)

Factor substitution is the substitution of capital for labour in production processes as:

•Innovation – Availability of new technologies

•Reduced capital costs – Falling prices of capital

•Increasing labour costs – Increasing wage rates making labour relatively expensive compared to capital

Factor Substitution

Will all jobs be done by robots in the future?

Capital-intensive • ‘Capital’ refers to the equipment,

machinery, vehicles and so on that a business uses to make its product or service.

• Capital-intensive processes are those that require a relatively high level of capital investment compared to the labour cost.

• These processes are more likely to be highly automated and to be used to produce on a large scale.

• Capital is a long-term investment for most businesses, and the costs of financing, maintaining and depreciating this equipment represents a substantial overhead.

• In order to maximise efficiency, firms want their capital investment to be fully utilised

• In a capital-intensive process, it can be costly and time-consuming to increase or decrease the scale of production.

Labour Intensive• ‘Labour’ refers to the people required

to carry out a process in a business. • Labour-intensive processes are those

that require a relatively high level of labour compared to capital investment.

• These processes are more likely to be used to produce individual or personalised products, or to produce on a small scale

• The costs of labour are: wages and other benefits, recruitment, training and so on.

• Some flexibility in capacity may be available by use of overtime and temporary staff, or by laying-off workers.

• Long-term growth depends on being able to recruit sufficient suitable staff.

• Labour intensive processes are more likely to be seen in Job production and in smaller-scale enterprises.

Plenary

• Loop Cards

• Can you complete the loop within 60 seconds?