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Production and Efficiency


Production and Efficiency Content Specialisation Division of labour Exchange Production and productivity Economies of Scale Economic Efficiency Specialisation ... – PowerPoint PPT presentation

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Title: Production and Efficiency

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

  • Specialisation occurs when a business focuses on
    producing a limited number of goods and leaves
    the production of other goods to other
  • 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
  • Advantages
  • Improve their skill level and expertise
  • Receive more money as they do a more specialised
  • Disadvantages
  • Boredom due to monotony of job
  • Quality of work and skills may suffer due to
  • Workers could be replaced by machinery

  • 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 Scale
  • As 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 Scale
  • Are 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
  • Reputation

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

Diseconomies of Scale
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
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

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 doesnt 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

  • 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