Slide_4-2.ppt

S10 IGCSE®/O Level Economics 4.2 Organization of production  Retrieval Practice Write down what you can remember about a sole trader. Who owns? Pros? Cons? Who owns a company? What are the two types of company? What is the difference between the two?  Novembe...

S10 IGCSE®/O Level Economics 4.2 Organization of production  Retrieval Practice Write down what you can remember about a sole trader. Who owns? Pros? Cons? Who owns a company? What are the two types of company? What is the difference between the two?  November 2010 Explain two factors that determine the demand for, and supply of, labour in an economy. (6 marks) The demand for labour: Labour is a derived demand – demand for workers depends on the demand for the product they produce. give tax relief to firms to encourage an increase in production, which would lead to the employment of more labour. regional policy to encourage firms to locate in particular areas, which would increase the demand for labour in those areas government policy in relation to the public sector, which will lead to an increase or decrease in the demand for labour depending on that policy. The supply of labour: provide effective training/retraining schemes provide a good system of education minimum wage legislation will encourage workers to offer themselves for employment. Page 221 Activity 3.22 The chain of production for bread may be as follows. Farms plant seeds to grow wheat Wheat is harvested Insurance firms provide insurance to protect farms from risk of damage or theft Commercial banks provide loans and payment services for farmers Road haulage service providers transport harvested wheat and finished breads  Insurance firms provide insurance to protect road haulage companies from risk of damage or theft Commercial banks provide loans and payment services for road haulage companies Wheat, water, yeast and other ingredients are mixed together to produce dough Coal and oil are used to power electricity stations for use by the bakery Insurance firms provide insurance to protect the bakery from risk of damage or theft  Commercial banks provide loans and payment services for the bakery Dough is poured into baking pans and placed in ovens to cook Food inspectors check the quality and hygiene of the breads and the bakery Sealed packets for the bread are produced and labelled in printing machines Finished loaves of bread are sealed in plastic packaging Road haulage service providers transport harvested wheat and finished breads  Supermarkets and other shop sell bread to consumers Coal and oil are used to power electricity stations for use by firms and households Insurance firms provide insurance to protect supermarkets from risk of damage or theft Commercial banks provide loans and payment services for the bakery Consumers buy bread Coal and oil are used to power electricity stations for household consumption  Consumers make sandwiches or toast to consume Commercial banks provide loans and payment services for households  Production 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)  Production adds value to resources 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 = profit + wages  https://www.youtube.com/watch? v=ccqaAvUX_iY  Industrial sectors An industrial sector or industry is a group of firms specializing in similar goods and services, or using similar production processes Primary sector The extraction and production of natural resources Secondary sector Construction and manufacturing Manufacturing: turning unprocessed natural resources and other unfinished products into other goods Tertiary sector Personal and business services Aims of production 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. These are examples of other types of organization: Charities aim to help people or animals in need, or to protect the natural environment. They rely on donations or gifts of money to cover their costs Not-for-profit organizations, such as cooperatives and local sports and social clubs, are run for the benefit of their members. Any surplus of revenue over costs is used to reinvest in the organization or to lower prices Public sector organizations provide public services, e.g. public health services, education  Productivity Productivity measures the amount of output (goods and services) that can be produced from a given amount of input (land, labour and capital resources). ▲ Productive ▲ More productive The aim of any business will be to combine its resources in the most efficient way: to produce as much output as it can with the least amount of resources it can, and therefore at the lowest cost possible.  Labour productivity Labour productivity is the most commonly used measure of factor productivity. It can be measured by the average amount of output each employee produces per period of time, or by the average amount of revenue each employee contributes per period of time, as a result of his or her efforts. Activity 3.23 – Passport to Success  Improving productivity Same amount of inputs, same costs but more output = lower average cost per unit Strategies to increase productivity include: training employees to improve their skills rewarding increased productivity with performance-related pay increasing job satisfaction replacing old equipment and machinery with new technologies introducing new production processes to reduce waste, improve quality and speed up production the division of labour factor substitution Ford and Taylor Scientific Management (E dited) - YouTube https://youtu.be/DfGs2Y5WJ14  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 Advantages Disadvantages It makes best use of an Carrying out the same task employee’s abilities again and again may become It reduces time spent by boring employees changing tasks Workers may lack pride in It allows greater use of their work because they do not machinery see the final result of their efforts It increases output Products become too standardized through mass production  Capital or labour intensity in production? Labour-intensive production Capital-intensive production The relative demand for labour and capital by a firm will depend on: how much output consumers demand the cost of labour relative to the cost of employing capital the productivity of labour relative to capital Factor substitution Factor substitution is the substitution of capital for labour in production processes as: the productivity of capital equipment increases relative to labour the cost of capital falls relative to wage costs The costs of production Fixed costs do not vary with output, e.g. rent, insurance premiums, loan repayments Variable costs vary directly with output, e.g. cost of materials, Total variable cost: variable cost per unit x number of units Total cost: total fixed cost + total variable cost Activity 3.25 – Definition and Calculation of Costs of Production.  The costs of production (activity 4.12) Magazines Total Total Total Average Total Profit or per month fixed variable cost cost Revenue Loss costs costs 0 $4,000 0 $4,000 - 0 - $4,000 1,000 $4,000 $3,000 $7,000 $7.00 $5,000 -$2,000 2,000 $4,000 $6,000 $10,000 $5.00 $10,000 0 3,000 $4,000 $9,000 $13,000 $4.33 $15,000 $2,000 4,000 $4,000 $12,000 $16,000 $4.00 $20,000 $4,000 5,000 $4,000 $15,000 $19,000 $3.80 $25,000 $6,000 6,000 $4,000 $18,000 $22,000 $3.67 $30,000 $8,000 7,000 $4,000 $21,000 $25,000 $3.57 $35,000 $10,000 8,000 $4,000 $24,000 $28,000 $3.50 $40,000 $12,000 Price = $5 per magazine The average cost of each unit of a good or service will tend to fall as output rises because total fixed costs are spread over a much larger output But, after a point, average costs may start to rise again if it becomes more difficult and expensive to increase output  The costs of production (activity 4.12) Magazines Total Total Total Average Total Profit or per month fixed variable cost cost Revenue Loss costs costs 0 $4,000 0 $4,000 - 0 - $4,000 1,000 $4,000 $3,000 $7,000 $7.00 $5,000 -$2,000 2,000 $4,000 $6,000 $10,000 $5.00 $10,000 0 3,000 $4,000 $9,000 $13,000 $4.33 $15,000 $2,000 4,000 $4,000 $12,000 $16,000 $4.00 $20,000 $4,000 5,000 $4,000 $15,000 $19,000 $3.80 $25,000 $6,000 6,000 $4,000 $18,000 $22,000 $3.67 $30,000 $8,000 7,000 $4,000 $21,000 $25,000 $3.57 $35,000 $10,000 8,000 $4,000 $24,000 $28,000 $3.50 $40,000 $12,000 1. Calculate the cost, in money terms, of each of the factors listed above. 2. The value of the global coffee industry has almost doubled in the past decade to $90bn, according to Euromonitor. Despite fears that climate change could reduce supply in the medium to long term, a combination of better than expected harvests with more efficient producers and currency markets has conspired to keep wholesale prices low. Draw a demand and supply curve to reflect what has happened over the past decade. 3. Both Brazil and Honduras last year reported record coffee output, while Colombia has been producing its highest levels since the 1990s. But demand has not kept pace and there is a massive oversupply in the market. Draw another diagram to illustrate this.  4. “A lot of farms are being abandoned,” says Sonia Vásquez, an organic coffee grower on the slopes of San José, south-west Honduras. “A lot of people are migrating — many can no longer make ends meet.” Explain how “the invisible hand” is leading to lower prices for coffee producers and why this forces them to abandon their farms and leave the market. Profit, loss or break-even? Profit = total revenue – total cost Break-even level of output : total revenue = total cost or total revenue – total cost = 0 How to make it easier to break-even