Firms and Production

Production and Productivity:

Production:

Production is an economic activity that deals with the production of goods and services as output with the use of factors of production as inputs to satisfy consumer needs and wants. This economic activity takes place in a plant which is a premise or area usually known as a warehouse or a factory where the factors of production are combined to produce goods and services. The main aim of production is to satisfy consumer needs and this process is only completed when these goods and services reach the organisations or consumers that want them. The warehouses and shops sell these goods and services to consumers and to all the people who need it. Other factors such as transportation, insurance and various capital equipment such as machinery are a part of this production process. Any production activity adds value to the factors of production or resources used.

Value-added:

Value Added in production is the difference between the market price of the product and the cost of the natural man made component or equipment that is used to make it. Value added is equal to the wages paid to the workers who are employed as the factor of production, labour.

What is specialisation?

Specialisation is when a product or task is focused on to gain a greater degree of efficiency..

Specialisation happens at all levels of economic activity

-Individual

-Business

-Country

Advantages of specialisation:

More output - workers become experts in the production of that particular good or service, more resources devoted to production of the same thing

Economies of scale - when a company increases its production scale (unit cost will decrease in the long run) the benefit of large scale production to the producer or company in forms of reduction in the unit cost of the product in the long run.

Innovation - When you repeat a particular thing over and over, new variations are tried

Less cost of production - no need for supervisors, thus costs reduce.

Disadvantages of specialisation:

Risk of over specialisation

Over-extraction of a country’s natural resources

Diversification:

Diversification is when firms grow by producing a range of different products and entering different markets to spread the risk. This allows the firm to gain revenue from consumer demand of other goods and services if consumer demand for one good or service tends to fall. An example of a diversified firms is Reliance Jio.

Productivity:

Productivity is the measure of the amount of output that is produced using a given amount of input. This allows firms to measure how efficiently they combined their resources to produce goods and services. The main aim of businesses is to provide goods at the lowest cost possible and maximize output and profit to the greatest amount possible. Productivity increases if more output or more revenue is generated with the same amount of resources or the same amount of output or revenue is produced using fewer resources. That is, if output increases at the same total cost, then average cost decreases which leads to an increase in productivity or increased output at a low cost of production. Or the same cost leads to an increase in revenue. An increase in productivity makes a firm more efficient as well as competitive as it increases its profits. If a firm fails to increase its productivity or the efficiency of the resources (factors of production) at the same pace or at a faster pace than the rival firms it will lead to the firm having higher production costs and lower profits, therefore hindering its survival.

Labour Productivity

Labour productivity is one of the most common measures of factor productivity. It is calculated by dividing the total output over a given period of time. It could be a day, week or month. If this is further divided by the number of workers employed we can find the average product of labour. This helps measure the efficiency of workers and how efficiently they use the resources provided.

Labour productivity = total output per period / number of employees

Average revenue product of labour can be calculated by dividing total revenue per period upon the number of employees. This acts as a better overall productivity measure.There are various other productivity measures such as performance measures which can be calculated depending upon the time spent waiting for an operation or the punctuality of meeting deadlines. There are few problems with productivity measures such they do not account for the quality of the product.

How can firms increase factor productivity?

• By training workers, that is providing education to help improve existing skills or help them learn new skills.

• By rewarding labour with performance related bonuses and commissions based on the increase in productivity

• By encouraging employees to buy financial stakes or shares in the organisation to help motivate them to increase productivity and raise profits

• Why increasing job satisfaction is improving the working environment for condition making jobs more varied introducing teamwork project and providing regular feedback on performance.

• By replacing old capital equipment such as machinery with more efficient, new machines

• Introducing lean production which is the introduction of new production processes and working practices that are designed to improve speed, reduce waste, improve quality, raise output and therefore overall increase efficiency of the previous production processes.

There are two types of production: labour intensive and capital intensive The demand for these factors of production depends on the production processes employed by the firm.

Capital intensive production: These methods require more capital input than labour. These processes are usually fully or partially automated and mass produce similar or identical products. They produce at a faster rate and are usually comparatively cheaper to the skilled labor. However the initial total cost may be high because these capital equipment are very expensive.

Labour intensive production:

It is commonly used in service industries such as the tertiary industry as well as the agricultural sector. They are used in hospitals, hotels, restaurants etc. This method is widely used for personalised services. Many goods are handmade by workers using tools to produce personalised or customised goods.

Determinants of demand for the factors of production:

Consumer Demand for goods and services: Demand for factors of production is derived demand which states that the employment of these resources depends on the need or want for a particular good or service. It is directly proportional to the consumer demand for goods and services.

Factor Price: The price of a particular resource or factor of production determines its employment. The greater the price of a factor of production the greater will be the cost of production for a firm. Example: Wages for skilled labour. Factors with relatively lower price are usually employed to obtain maximum profits.

Factor availability: Factor availability will affect both the price and quantity supplied of different FOPs. For example, the supply of highly skilled labour is low relative to the demand. Thus, these workers are able to demand higher wages. Some firms may not be able to afford these skilled labourers and thus may be forced to shift to more capital intensive methods of production.

Factor Productivity: Firms only employ factors of production if the result of its employment is profitable. This suggests that if a factor is able to add an additional amount which increases the cost incurred by the firm due to its employment, it is considered productive.

Factor Substitution:

This process involves the replacement of labour with capital or vice versa. Modern firms have replaced labour with capital as technological advancements have proved to improve the efficiency, speed and productivity of capital which is comparatively greater to labour’s. Capital has also become cheaper to employ. Many production processes are taken over by intelligent robots and this is called computer aided manufacture. These robots have replaced the labour required in a firm. Substituting labour for capital also results in disputes with the trade union and therefore is not favourable at times. Capital and labour are not perfect substitutes for each other. The ability of a firm to substitute depends on the type of product being produced and the production process used.