Production & Efficiency

Quick revise
Specialisation

Specialisation occurs when a business focuses on producing a limited number of goods and leaves the production of other goods to other businesses. Specialisation can also occur by: Region. e.g. Sheffield and Steel International. Coffee and Brazil

Advantages of Specialisation to a Business

  • 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 of Specialisation to a Business

  • Increased costs of training workers
  • May be a decrease in quality as workers are bored by doing the same job

Advantages of Specialisation to Workers

  • Improve their skill level and expertise
  • Receive more money as they do a more specialised job

Disadvantages of Specialisation to Workers

  • Boredom due to monotony of job
  • Quality of work and skills may suffer due to boredom
  • Workers could be replaced by machinery

Exchange

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

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

Production & 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 Influencing 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 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.
Types of Internal Economies of Scale

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

Those economies of scale shared by a number of businesses in the same industry in a particular area. 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 nearby.

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

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

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 profits

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 doesn’t result in any unit cost benefits

Diseconomies of Scale
  • Occur when firms become too large or inefficient
  • Average costs per unit start to rise
  • Types of diseconomy of scale can be seen below

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

Example question

To what extent do economies of scale act as a barrier to new firms entering the market and increase the monopoly power of current firms? Use your knowledge and any economic date to help you answer this question. (15 marks)

Mark Scheme

Level 1 Doesn’t identify any issues. Shows little understanding of economics. Lacks evaluation and analysis. Question not answered adequately. Few, if any, relevant issues are recognised. Economic concepts and principles are 0 to 3 marks

Level 2 Identifies at least one issues. Uses basic economics to answer the question. Some identification of different points of view but evaluation is lacking or very basic. Answer lacks clear structure and fails to fully understand the question. or more relevant issues are recognised. Basic terminology may be used. 4 to 6 marks

Level 3 At least two issues identified. Economic concept and ideas are applied and understanding is demonstrated. Looks at alternative viewpoints and evaluates key issues / arguments. Uses key economic terms. 7 to 10 marks

Level 4 Shows a good understanding of economic concepts and models which are used to help answer the question. Demonstrates an understanding of different view points which enables evaluation of the issues and arguments. Conclusions are drawn. 11 to 13 marks

Level 5 Identifies at least three issues. Demonstrates a good understanding of economic models and concepts which are applied to help answer the question. Looks at alternative points of view. Uses theory to help evaluate key issues and support conclusions. 14 to 15 marks