Production and efficiency

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specialisation, the division of labour and exchang

  • specialised goods in nations can be traded with specialised goods from other nations

Benefits of the division of labour:

  • increased aptitude:- repetition of tasks lead to them being done more expertly.
  • time saving:- there is likely to be less time spent switching between tasks.
  • working to one's natural strength
  • use of capital equipment:- as tasks ages undivided, it becomes worthwhile to use machinery

Specialisation requires exchange. Workers can only specialise in financial services, for instance, if they know they will be able to exchange their services for other g/s such as food and housing.

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Production, productivity and productive efficiency

  • production - the total output of g/s produced in a market AND the means by which consumer wants are satisfied.
  • labour productivity = Total output per time period                                                                        number of units of labour

The advantages of higher productivity:

  • Lower average costs - improvements in labour and capital productivity allow businesses to produce output at lower average cost. This can be passed on to consumer as lower prices.
  • Improved competitiveness in international markets - productivity and lower costs help make the UK competitive globally.
  • Higher profits
  • Higher real wages - improvements in labour productivity can cause rises in wages.
  • Growth of the economy - economic growth depends on the stock of factors of production available and their productivity. increases here can shift the PPB to the right. However, rising productivity can lead to unemployment if the rate of growth of AD is less than the rate of productivity growth.
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costs of production

  • costs are expenses faced by a business when producing a g/s

Fixed costs: (do not vary directly with output)

  • Rent on buildings and business rates
  • the depreciation (decrease) in the value of capital equipment due to age
  • insurance charges
  • salaried staff costs (e.g. for staff on permanent contracts)
  • interest charges on borrowed money
  • the costs of buying new capital equipment
  • marketing and advertising costs

The greater the total volume of units produced, the lower the fixed costs per unit as the fixed costs are spread over a higher number of units. e.g. mass production can reduce unit costs for consumers because fixed costs continuously reduce.

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Economies of scale

Economies of scale:

the costs advantages that a business can exploit by expanding their scale of production. It lowers costs for the firm which show an improvement in productive efficiency that may be passed on to consumers in lower prices. They also give a business a competitve advantage, leading to lower prices and/or higher profits.

Internal economies of scale:  these arise from the growth of the firm itself

1. Technical economies of scale -

  • large scale business can afford to invest in expensive, specialist capital machinery whereas this would not be viable or cost-efficient for a small firm to do so.
  • In larger firms, specialisation occurs by splitting complex production processes into separate tasks to boost productivity.
  • The law of increased dimensions
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Internal and external economies of scale

2. Marketing - a large firm can spread its advertising and marketing budget over a large output.

3. Managerial - this is a form of division of labour. Larger businesses split complex production processes into separate tasks to boost productivity.

4. Financial - larger firms are usually rated by banks to be more 'credit worthy' and have access to credit facilities, with more favourable rates of borrowing. Businesses quoted on the stock market can gain capital through shares. Also, a firm with a strong buying power can purchase its raw materials in bulk at discounted prices e.g. tesco 

5. Network - widely used services and networks are more valuable to the business that provides them. 

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Diseconomies of scale

A firm may eventually experience a rise in average costs due to this. It may arise from:

1. control - monitoring the productivity and quality of output from lots of employees in costly/hard

2. Coordination - i can be hard to coordinate complicated production processes across different branches. Achieving efficient communication is costly.

3. cooperation - workers in large firms may feel a sense of alienation and loss of motivation if they do not feel themselves to be an integral part of the firm. This could decrease productivity.

Avoiding disceconomies of scale:

  • developments in human resource management including training, promotion and staff support. 
  • performance-related pay schemes to provide incentives for labour, increasing motivation
  • out-sourcing manufacturing and distributing operations to overcome problems of control and coordination. 
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