Production and Efficiency

Content

• Specialisation• Division of labour• Exchange • Production and productivity• Economies of Scale • Economic Efficiency

Specialisation

• Specialisation occurs when a business focuses on producing a limited number of goods and leaves the production of other goods to other businesses.

• Specialisation can also occur by:– Region e.g. Sheffield and steel – International e.g. coffee and brazil

Division of Labour

• The division of labour is where workers concentrate on a performing a few tasks and then exchange their output for other goods and services

Advantages and Disadvantages of Specialisation To A Business

Advantages• As workers specialise they

become quicker at producing goods, this reduces costs of production

• Level of production increases

• Workers are able to develop expertise

Disadvantages• Increased costs of training

workers• May be a decrease in

quality as workers are bored by doing the same job

Advantages and Disadvantages of Specialisation to Workers

Advantages• Improve their skill level and

expertise• Receive more money as

they do a more specialised job

Disadvantages• Boredom due to monotony

of job• Quality of work and skills

may suffer due to boredom• Workers could be replaced

by machinery

Exchange

• As you specialise you only produce a fixed amount of products

• In order to get all of the products that you require you need to exchange goods / services with other businesses / individuals

• By exchanging products you can ensure that you fulfil your needs and wants

Production and Productivity

• Production is the process of creating, growing, manufacturing, or improving goods and services.

• Productivity measures the efficiency or rate of production. It is the amount of output (e.g. number of goods produced) per unit of input (e.g. labor, equipment, and capital).

• Labour productivity measures the amount of output per worker

Factors That Influence Productivity

• Technology• Skills and experience of the labour force• Motivation • Quality of factors of production • Division of labour• Investment

Economies of Scale

• These occur when mass producing a good results in lower average cost.

• Average costs fall per unit – Average costs per unit = total costs / quantity produced

• Economies of scale occur within an firm (internal) or within an industry (external).

Internal and External Economies

• Internal Economies of ScaleAs a business grows in scale, its costs will fall due to internal economies of scale. An ability to produce units of output more cheaply.

• External Economies of ScaleAre those shared by a number of businesses in the same industry in a particular area.

Types of internal economy of scale

Example

Production / Technical Economies

•Larger firms can use computers / technology to replace workers on a production line •Mass production lowers cost per unit •Large scale producers can employ techniques that are unable to be used by a small scale producer.•Able to transport bulk materials.

Purchasing / Marketing Economies

• Advertising costs can be spread across products•Large businesses can employ specialist staff • Bulk buying – if you buy more unit cost falls

Financial Economies •Larger firms have better lending terms and lower rates of interest •Easier for large firms to raise capital.•Risk is spread over more products.• Greater potential finance from retained profits.• Administration costs can be divided amongst more products

Managerial Economies • More specialised management can be employed, this increases the efficiency of the business decreasing the costs

Risk-bearing Economies • large firms are more likely to take risks with new products as they have more products to spread the risk over

External Economies of Scale

• These are advantages gained for the whole industry, not just for individual businesses.

Examples of External Economies

• As businesses grow within an area, specialist skills begin to develop.

• Skilled labour in the area – local colleges may begin to run specialist courses.

• Being close to other similar businesses who can work together with each other.

• Having specialist supplies and support services nearby.

• Reputation

Diseconomies of Scale

• Occur when firms become too large or inefficient• Average costs per unit start to rise

Types of diseconomy of scale

Example

Communication •When firms grow there can be problems with communication•As the number of people in the firm increases it is hard to get the messages to the right people at the right time•In larger businesses it is often difficult for all staff to know what is happening

Coordination and control problems

•As a business grows control of activities gets harder•As the firm gets bigger and new parts of the business are set up it is increasingly likely people will be working in different ways and this leads to problems with monitoring

Motivation •As businesses grow it is harder to make everyone feel as though they belong •Less contact between senior managers and employees so employees can feel less involved•Smaller businesses often have a better team environment which is lost when they grow

Diseconomies of Scale

Economies of Scale and Monopolies

• Economies of scale can lead to the development of monopolies as larger businesses are able to exploit lower unit costs and therefore make more profits

Economies of Scale

• Minimum efficient scale – where an increase in the scale of production gives no benefits to a reduction in unit costs

• Minimum efficient plant size – where an increase in the scale of production of an individual plant within the industry doesn’t result in any unit cost benefits

Economic Efficiency

• A business is economically efficient if it has selected the combination of factors of production that enable it to produce its current output level at the lowest possible cost

• Firms are economically efficient if they are able to create large consumer and producer surpluses

Economic Efficiency

• Any point on the production possibility frontier is productively efficient

• Allocative efficiency only occurs if the business is producing goods and services that meet the wants and needs of consumers

Summary• Specialisation is where you concentrate on the production of a few

goods and services• Division of labour is where workers specialise in the production of

certain goods and services• Exchange occurs when specialisation occurs as workers exchange

what they have produced for other goods and services• Productivity refers to the amount of output created from a set number

of inputs• Economies of Scale result in lower unit costs as a company grows in

size• Economic Efficiency occurs where a business can produce its

maximum amount with the minimum cost