Production and Efficiency

AS Economics

Aims and Objectives

Aim: Level Understand price elasticity of supply Objectives: Define price elasticity of supply Calculate price elasticity of supply Analyse how price elasticity of supply can differ in the short run to the long run.

E-D C-B B-A*

Starter

When firms grow in size, is it always a good thing?

Specialisation

The production of a limited range of goods by an individual factor of production or firm or country.

Specialisation and The Division of Labour

http://www.youtube.com/wat ch?v=mbFCUsVG-do Specialisation at an individual level is known as the division of labour: one man draws out the wire, another straightens it, a third cuts it, a fourth points, a fifth grinds it at the top, it is even a trade by itself to put them into the paper

Specialisation and The Division of Labour

One worker might be able to make 20 pins per day if he were alone. Whilst ten workers specialising could make 48,000 pins a day!

Benefits of Specialising
Increased Abilities
Repetition of tasks leads to them being done more expertly.

Time Saving Working to Strengths

Use of Capital Equipment

Time saved switching between tasks.

Allows workers to do what theyre best at.

As tasks are subdivided, it becomes worthwhile to use machinery saving further effort.

Productivity Output per worker. Labour productivity = Total Output Per Time Period --------------------------------------Number of Units of Labour

UK Productivity Puzzle

Benefits of Higher Productivity

Lower Average Costs Improvements in labour allow firms to reduce costs, may be passed on to consumers in the form of lower prices.

Improved Competitiveness

UK firms can reduce costs and therefore develop competitive advantage internationally.

Benefits of Higher Productivity

Higher Profits Higher Real Wages Economic Growth
Firms with lower costs do not have to reduce prices, and so can make higher profit margins. Firms are better able to afford higher wages and will do so to motivate greater efficiency. The capacity of the economy increases, leading to an outward shift in the PPB.

Costs of Production

Costs that do not vary with production Rent, rates

Variable Costs
Costs that vary with production. Raw materials

FC+VC ATC is TC/Output

Fixed Costs

Total Costs

Economies of Scale
Where an increase in the scale of production leads to a reduction in average total costs for firms.

Internal

External

Diseconomies of Scale
Where an increase in the scale of production leads to increases in average total costs for firms.

Economies and Diseconomies of Scale

Economies of Scale Diseconomies of Scale

Cost Per Unit

ATC

MES

Output

Productive Efficiency
Occurs when producers minimise wastage of resources in their production processes, and when firms grow in size. Known as the minimum efficient scale.

Most efficient quantity to produce at.

Types of Economies of Scale

Economies of Scale
Internal Economies of Scale
External Economies of Scale

Internal Economies of Scale

Technical Economies of Scale Investment in large scale machinery to reduce unit cost. Specialisation of workforce. Marketing Economies of Scale A large firm can spread its advertising budget over a large output.

Internal Economies of Scale

Managerial Economies of Scale Hiring better qualified managers raises productivity and reduces unit costs. Financial Economies of Scale Larger firms have greater access to finance from lenders and stock markets, and so can grow quicker than small firms.

External Economies of Scale

External economies of scale occur outside of a firm but within an industry. For example investment in a better transportation network servicing an industry will resulting in a decrease in costs for a company working within that industry.

Diseconomies of Scale
Control Controlling and monitoring a large firm is difficult and costly. Coordination Can be difficult and costly to coordinate across many locations/countries. Cooperation Labour in large organisations may feel surplus if not used efficiently demotivated and unproductive raising costs.

EOS & DOS

Units of Labour 5 6 7 8 9 10 Units of Capital 7 8 9 10 11 12 Quantity Produced 10 18 25 32 35 37 Cost per Unit of Output ()

The table above shows the output of a firm given different levels of factor inputs. Assuming labour costs are 100 per unit and capital costs are 1,000 per unit: Complete the final column of the table. Over what output range does the firm begin to experience diseconomies of scale? Assume the data relate to a manufacture of home computers. Explain two possible economies of scale that might be available to the firm. Discuss the view that diseconomies of scale are unavoidable as firms continue to expand their output.