2. Production Process
• Production is a process of combining various material inputs and
immaterial inputs (plans, know-how) in order to make something for
consumption (output).
• It is the act of creating an output, a good or service which has value
and contributes to the utility of individuals.
3.
4. 3 sector hypothesis
• Primary industry: The primary sector includes all those activities the
end purpose of which consists in exploiting natural resources:
agriculture, fishing, forestry, mining, deposits.
• Secondary industry: A secondary industry is an industry that takes
raw materials as input and creates finished products as output. This
can be contrasted with primary industries that produce raw
materials and tertiary industries that produce services. A
large secondary industry is characteristic of an industrial economy.
5. • Tertiary industry: the part of a country's economy concerned with the
provision of services. Examples of tertiary industries may include:
• Telecommunication.
• Hospitality industry/tourism.
• Mass media.
• Healthcare/hospitals.
• Public health.
• Pharmacy.
• Information technology.
6. Less developed countries (LDCs)
• Primary > secondary > tertiary
• Less-developed countries (LDC) are low-income countries that face
significant structural challenges to sustainable development.
• The United Nations' list of LDCs currently comprises 47 countries.
7. developed countries (DCs)
• Teritary > secondary > primary
• developed economy is typically characteristic of a developed
country with a relatively high level of economic growth and security.
• Standard criteria for evaluating a country's level of development
are income per capita or per capita gross domestic product, the
level of industrialization, the general standard of living, and the
amount of technological infrastructure.
8. Production Time
• Momentary time period: a time period during which a firm is unable to
alter its factors of production, in response to the change in the demand and
price of the product.
• During this time period supply is fixed and inelastic
• Short-run time period: a time period during which at least one factor of
production is fixed.
• Here labor is usually a variable factor where as capital and land are fixed.
9. • long-run time period: a time period during which a firm is able to change
all its factors of production, there is no change in techniques of production
or no change in technology.
• Very long-run time period: a time period during which a firm is able to
change all its factors of production along with the techniques of production
or technology.
10. LABOR-INTENSIVE & CAPITAL-INTENSIVE
PRODUCTION
• Every firm required a different combination of factors of production. Some are labor intensive and
some are capital intensive.
• Labor Intensive: These firms deployed a higher proportion of labor as compared to other factors of
production. Example: Traditional agriculture, Teaching, Psychiatry, film making, etc. The cost of labor
intensive products can be high since specialist labor is being developed.
• Capital Intensive: These firms deployed a higher proportion of capital as compared to other factor of
production. Example: Car manufacturing, aircraft manufacturing, oil production etc. Capital intensive firms
invest in automated machinery, CAD and CAM, tools etc. which can be costly in the start however in the
long rub can lead to reduction in average costs due to technological economies of scale. These firms tend to
produce standardized products in mass quantity which helps lower the per unit costs.
11. Factors that affect the choice of labor vs capital
intensive
Factor Description
Cost of Labor vs Capital The Factor the lowest cost would be chosen assuming that
labor and capital can both perform the same risk
Size of the Market If size of the market is large firms usually prefer capital
intensive. Example Coke. If the Size of the market is small
or deals with personalized services then it would be more
labor intensive. Example: Teaching.
Firm’s Objective If the Objective is to maximize profits firms would tend to
use capital intensive, however if the objective is social welfare
might be labor intensive to keep jobs.
12. PRODUCTION AND PRODUCTIVITY
• Production: Is the total output of goods and services in the production process. It can be increased by mote factors of production or higher
productivity of existing resources.
• Production = Factors of Production + Productivity
• Productivity: It describe how efficiently are inputs converted into outputs. It is the measure of efficiency. This can be calculated in two ways, Labor
productivity and Capital Productivity. Labor Productivity can be enhanced by employing few but skilled labor and capital productivity can be enhanced
by deploying technologically advanced machinery. Productivity can be calculated using the following formulas:
• Labor Productivity = ________Total Output_________
• Average number of worker
• Capital Productivity = ________Total Output_________
• Capital Employed
13. Advantages Description
Economies of Scale This when by increase the scale of production average cost per unit decreases.
Lower costs can reduce price and increase company profits.
Higher Profits Profit earned due to low cost can be reinvested in training workers, hiring
efficient staff and investing in superior technology and research. This gives the
firm a competitive edge over competitive edge over competitors and improves the
quality of goods being produced.
Improve competitiveness This help the firm build a competitive edge over competitors. More efficient
firms can dump their products in other countries to take down competition.
Economic Growth As discussed earlier in section 1 a country’s PPC shifts outwards if the
productivity increase. This can help the country achieve a point of PPC which
was previously not achievable. This can increase employment, Improve
standard of living, and can generate more taxes for the government.
Advantages of High productivity to an economy?
14. Determinants of Productivity
Factor Description
Investment If a firm invests more in high tech machinery and technology productivity will go
up. However, this is only possible if interest rate is low because borrowing is
cheaper.
Innovation This includes both product and process innovation. This includes developing
better technology like emails to make work and communication cheap and less
time consuming
Skills and experience If the skills of a labor are improved this improves his quality of work. This can be
achieved by better training.
Entrepreneurial Sprit Entrepreneurs tend to invest in new technologies and create innovative products
in pursuit of profits. More the willingness the more productive the system gets.
Competition If the competition in the market is high every firms will tend to reduce operation
costs and tend to innovate to stay ahead of the competition. This improves the
overall innovation and helps boost the overall productivity.
16. Cost
• Costs are all expenses and payments in the production process. Example: paying salaries, payments
rent, paying taxes etc. Costs can be categorized in FOUR ways:
1. Fixed Costs
2. Variables Costs
3. Total Costs
4. Average Costs
5. Average Fixed Cost
17. Fixed Costs (FC)
• It is the part of total cost which does not vary
with the output and will incur even at zero
output level. Example: Rent, interest on loan,
Staff salary, license fees etc.
• As we see from the diagram above,
graphically fixed cost curve is horizontal or
parallel to the x- axis
18. Variable Cost
• It is the part of total cost which does varies with
the output and fall to zero when output is zero.
Example: Cost of raw material, wages, and
transportation.
• As we see from the diagram above, graphically
the variable cost curve:
1. Always originate frim zero
2. Is upward sloping and
3. Is parallel to the total cost curve
19. Total cost
• It is the sum of all fixed and
variable costs on the
production process.
• Total Cost = Fixed Cost +
Variable Cost
20. Average Cost
• It is the total cost per unit of output. In other
words, it is the cost of making one product.
When the firm experiences “economies of
scale” the average cost decrease and when
the firm experiences “diseconomies of
scale” the average cost increase.
• Average Cost = Total Cost_________
• Total Output
21. Average Cost
• Example:
• TC = $5000
• Q = 100
• AC = 5000/100 = $5/unit
• As we see from the diagram above, graphically the AC curve falls with the rise in output (From
point a to b). At b the average cost it is minimum and after b the AC rises with the increase in output.
The reason for this is that with an increase in production average fixed cost decreases continuously
however average variable decreases till a certain point after which it starts to increase.
22. AverageFixedCost
• It is the total cost divided by output. As the
output increases the cost decreases
• AFC = -------- FixedOutput_________
• Total Output
23. Function of cost
1. Helps in profit and Loss Calculation
2. Helps managers in taking decisions
3. Helps in calculating total cost
4. Nature of the cost can help in planning
24. REVENUES
• It is the money that a business receives from the sale of goods and services It is also known as sales
revenue, sales turnover or Total Revenue.
• Sales Revenue = Price x Quantity Sold
• Example:
• Selling price per unit = $2
• Unit Sold = 1000
• Sales Revenue / Total Revenue / $2000
25. REVENUE
• As we see from the diagram above,
graphically the Total Revenue curve:
1. Originates from zero and is upward slopping
2. TR should not be confused with Variable
Cost curve. Both of them have same shape
however VC is parallel to TC whereas TR
cuts TC.
26. • It is the total revenue per unit output sold. In other words, it is the revenue earned from
sale of one unit. This is also known as the average price of a good.
• Average Revenue = ________Total Revenue_________
• Total Output
• Example:
• Total Revenue = $10,000
• Unit Sold = 1000
• Average Revenue = 10,000 / 1000 = $10
27. PROFIT AND BREAK-EVEN
1. Profit
• Definition: It is a point where TR becomes equal to TC. A break-even chart gives the graphical
representation of profit. Beyond the break-even point the company makes a profit, below the break-
even company makes a loss. On the break-even no profit, no loss.
•
• Profit = Total Revenue – Total Costs
28. PROFIT AND BREAK-EVEN
1. Break Even
• Definition: It is a point where TR becomes
equal to TC. A break-even chart gives the
graphical representation of profit and losses
and should always be nake in the exam to
illustrate the concept of profit. Beyond the
break-even point the company makes a profit,
below the break-even company makes a loss.
On the break-even no profit, no loss.
29. PROFIT AND BREAK-EVEN
• As we see from the above diagram all points
ahead of “1000” will generate a profit since
TR>TC. However, any point behind “1000” will
generate a loss, The area of profit is shown by the
shaded region after point “1000” and the area of
loss is the shaded region behind point “1000”
• Profit = TR>TC
• Loss = TR<TC
• Break-Even = TR = TC
30. BUSINESS OBJECTIVES
• Corporate objectives are those that relate to the business
as a whole.
• They are usually set by the Top management of the
business and they provide the focus for setting more
detailed objectives for the main functional activities of the
business.
31. Objective Description
1. Profit Maximization This is when business try to maximize the different between its cost and revenues.
They help the business grow and persuade business owners to take risks. It can
also be regarded as the point where Marginal Cost = Marginal Revenue.
1. Growth This aims to maximize sales and value of output. This helps the firm earn
economics of scale, these firms enjoy greater control over the market and
motivates managers to work hard.
1. Increase Market Share This is the ration between the sales of the company and the sales industry. Higher
the market share, the larger the business.
Market Share % = Company Sales x 100
Total Market Share
1. Survival This is usually an objective for newly established business. Here the business aims
to stay in the market and just cover it costs.
1. Corporate Social Responsibility This objective is set by businesses that consider the interest of their stakeholders
and not only their shareholders when taking decisions. These company’s give
better treatment to workers, customers, environment etc.
1. Image and Reputation These companies tend to portray themselves in a positive light in front if their
stakeholders. Example: Welfare campaigns, call backs in case of potential
problems etc.
