CIE IGCSE 3.6 and 3.7 Firms and Production and Costs, Revenue, Objectives - Miss Patel

CIE IGCSE UNIT 3.6-3.
7
FIRM: PRODUCTION, COSTS, REVENUES AND
OBJECTIVES
MISS PATEL
LEARNING OBJECTIVES PART I
• Describe what determines the demands for the factors
of production
• Define productivity and recognize the difference
between productivity and production
• Identify factors that increase productivity
• Understand factor substitution and why firm substitute
one factor for another
• Distinguish between capital intensive and labour
intensive production
LEARNING OBJECTIVES PART II
• Define total and average cost, fixed and variable cost,
and perform calculations
• Analyse and show changes in costs and output changes
• Define total and average revenue and calculations
• Calculate profit/loss from total revenue and cost
• Identify break even point
• Describe profit maximization and that business have
different goals
WHAT IS PRODUCTION?
Goods and services are produced to satisfy consumers’
needs and wants
The production of goods and services is organized by
entrepreneurs in firms
PRODUCTION is when a firm combines land, labour and
capital (inputs) to make goods and services (outputs) that
provide UTILITY.
WHAT DETERMINES THE DEMAND FACTORS OF
PRODUCTION?
• The demand for factors of production are determined by the
consumer wants, which in turn are affected by income (the
business cycle) and tastes, habits, etc.
• The demand for factors is a DERIVED DEMAND. As consumer
demand increases for cars, so does the derived demand for
robots and labour in car manufacturing.
• and the resources available. If a particular factor is scarce, such
a type of skilled labour, or the cost is higher, demand for
physical capital may increase (factor substitution)
• As production aims to satisfy consumer wants
• Consumer wants are increased when value is added to the
good or service.
• What is value added?
PRODUCTION ADDS VALUE TO RESOURCES
Production adds value to resources by turning them into goods and
services consumers want and are able to buy and that provide consumers
with satisfaction/ utility.
Value added: THE DIFFERENCE

BETWEEN THE MARKET PRICE
paid for a product by a consumer
and THE COST OF THE NATURAL
AND MAN-MADE MATERIALS,
components and resources used
to make it .
The value of labour (wages) adds

to value (since it is involved in
processing/making to increase
utility) it is not a material cost.
Value added is NOT the same as profit which is Value added = profit + wages
TR – TR (labour is inc. in TC)
EXAMPLE
• A firm produces $1 million cans of fizzy drink which are
sold for $1 each
• However, they cost $400,000 to produce
• Therefore, $600,000 has been added to the value of the
resources used in their production
WHAT IS PRODUCTIVITY?
Productivity measures the amount of output (goods and services)
that can be produced from a given amount of input (land, labour and
capital resources).
▲Productive ▲More productive

The aim of any business will be to combine its resources in the most
efficient way:
to produce as much output as it can with the least amount of resources
it can, and therefore at the lowest cost possible. i.e. MAX output from
MIN input!
DIFFERENCE BETWEEN PRODUCTION AND
PRODUCTIVITY? HOW CAN PRODUCTIVITY BE
ENHANCED?
• Production is the process of combining units of inputs
(natural, man-made and human resources) to create
output (goods and services) capable of satisfying human
needs and wants – that is, providing utility to consumers.
• Productivity is the increase of output from each unit in
the production process. It is output per unit input for e.g.
output per unit worker.
• HINT: Any factor that either increases the QUALITY
Or QUANTITY of factors of production will increase
Productivity (shift PPF outward)
IMPROVING PRODUCTIVITY
Same amount of inputs, same costs but more output = lower average
cost per unit. Explain HOW the following strategies increase
productivity (AO2)
• Training employees to improve their skills
• Rewarding increased productivity with performance-related pay

• Increasing job satisfaction
• Replacing old equipment and machinery with new technologies
• Introducing new production processes to reduce waste, improve
quality and speed up production
• The division of labour

• Factor substitution
SPECIALISATION – EVALUATE..
• When an economy, firm or individual concentrates its
resources (or factors of production) into producing one or
small range of goods and services that it is good at.
• This means that the firm can make the best possible use of the
skills and resources it has. This minimizes opportunity cost.
• Therefore can add much more value to resources per unit
input.
• However, specialization could also mean a firm will be at
greater risk from a fall in consumer demand for its product.
Why is this?
• Evaluate the case for the firm specializing in production of just
a narrow range of goods.
ACTIVITY 4.8
• Complete the activity 4.8 ques 1 in pairs. We will
discuss what we found and explain with the class.
• HW due tomorrow.
• Read Section 1 & 2 p. 210-216
INDUSTRIAL SECTORS
An industrial sector or industry is a group of firms specializing
in similar goods and services, or using similar production
processes
Primary sector
The extraction and production of natural resources
Secondary sector
Construction and manufacturing
Manufacturing: turning unprocessed natural resources
and other unfinished products into other goods
Tertiary sector
Personal and business
services
AIMS OF PRODUCTION – THREE TYPES OF
ORGANISATION
Most private sector firms aim to maximize profit. What is profit?
Profit is a surplus of revenue over costs. It is reward for

enterprise and risk taking. Without it people would not
start up and own business organizations.
These are examples of other types of organization:

•Charities aim to help people or animals in need, or to protect the
natural environment. They rely on donations or gifts of money to cover
their costs
•Not-for-profit organizations, such as cooperatives and local sports and
social clubs, are run for the welfare of their members. Any surplus of
revenue over costs is used to reinvest in the organization or to lower
prices. Revenue is used to cover costs.
•Public sector organizations provide public services, e.g. public health
services, education
PROFIT MAXIMIZATION
• Make as much profit as possible. This involves minimizing
production costs and maximizing revenue.
• A firm that is unable to cover its costs with enough sales
revenue will make a LOSS and could be forced to close down
• This could happen it it: Fails to make a product consumers
want at the price and quality consumers want
• Fails to produce products at the same or lower costs than
competitors
• What other objectives might a firm have? Imagine if the firm
needs to get rid of excess stock which is perishable? Imagine if
a firm is run by directors or managers who’s bonuses are linked
to revenue (not profit)?
LABOUR PRODUCTIVITY
Labour productivity is the most commonly used measure of factor
productivity.
It can be measured by the average amount of output each employee
produces per period of time, or by the average amount of revenue each
employee contributes per period of time, as a result of his or her efforts.
QUESTIONS
• If Yew Wah produced 400 machines per month, with a
total of 10 employees, what is the average product of
labour?
• If the machines sell for $1,000 per unit and all are sold by
month end, what is the average revenue product of
labor?
QUESTIONS
• 400/10 = 40 is the average product of labour
• $400,000/10 = $40,000 average rev. product of labour.
THE DIVISION OF LABOUR – THE CASE
The BREAKDOWN OF production PROCESS into SUB-TASKS which are
allocated to SPECIALISED WORKERS
Advantages Disadvantages
• It makes best use of an employee’s • Carrying out the same task again and again
abilities/ skills increasing productivity may become boring/ monotonous and thus
and reducing opportunity cost. reduce motivation levels.
• It reduces time spent by employees • Workers may lack pride in their work
switching tasks. Focus on one task. because they do not see the final result of
Increasing labour productivity. their efforts. They feel alienated from the
• It allows greater use of specialist ‘whole’.
machinery. • Products become too standardized through
mass production. Little variety limits utility.
• Task repetition leads to enhanced skill
and thus productivity. • Over-reliance of workers on each other and
• Training costs are reduced since not all risk in breakdown of production chain if
workers need to be trained on all tasks workers are only trained in one task. Limits
flexibility.
CAPITAL OR LABOUR INTENSITY IN
PRODUCTION?
Labour-intensive Capital-intensive
production production
The relative demand for labour and capital by a firm will depend on:
• How much output consumers demand
• The cost of labour relative to the cost of employing capital
• The productivity of labour relative to capital
HOMEWORK.
• Complete CW/HW Sheet
• Review Edmodo for amended homework assignment.
WHAT IS FACTOR
SUBSTITUTION? THE
PROS AND CONS?
Factor substitution is the substitution of capital for labour in production
processes as:
• The productivity of capital equipment
increases relative to labour
• The cost of capital falls relative to
wage costs
But:
• Machines cannot replicate the work of a doctor, solicitor,
hairdresser or other workers providing personalized care and services
• Some firms cannot afford to install and maintain new machinery
• Some consumers want personalized not mass-produced products
•LOOK UP COMPUTER AIDED MANUFACTURING – definition and two e.gs GO!
THE COSTS OF PRODUCTION –
FIXED VS VARIABLE COSTS
Fixed costs
do not vary with output, e.g. rent,
insurance premiums, loan repayments
Variable costs
vary directly with output, e.g. cost of
materials, performance-related pay
Total variable cost:

variable cost per unit x number of
units
Total cost:
total fixed cost + total variable cost
THE COSTS OF PRODUCTION (ACTIVITY 4.12)
Magazines Total Total Total Average Total Profit or
per month fixed variable cost cost Revenue Loss
costs costs
0 $4,000 0 $4,000 - 0 - $4,000

1,000 $4,000 $3,000 $7,000 $7.00 $5,000 -$2,000
2,000 $4,000 $6,000 $10,000 $5.00 $10,000 0
3,000 $4,000 $9,000 $13,000 $4.33 $15,000 $2,000
4,000 $4,000 $12,000 $16,000 $4.00 $20,000 $4,000
5,000 $4,000 $15,000 $19,000 $3.80 $25,000 $6,000
6,000 $4,000 $18,000 $22,000 $3.67 $30,000 $8,000
7,000 $4,000 $21,000 $25,000 $3.57 $35,000 $10,000
8,000 $4,000 $24,000 $28,000 $3.50 $40,000 $12,000
• The average cost of each unit of a good or service will tend

to fall as output rises because total fixed costs are spread
over a much larger output (this relates to technical
economies of scale)
• But, after a point, average costs may start to rise again if it
becomes more difficult and expensive to increase output
PROFIT, LOSS OR BREAK-EVEN?
Profit = total revenue –
total cost
Break-even level of
output :
total revenue = total
cost
or
total revenue – total
cost = 0
HOW TO MAKE IT EASIER TO BREAK-EVEN….

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CIE IGCSE UNIT 3.6-3.

Value added: THE DIFFERENCE

The value of labour (wages) adds

▲Productive ▲More productive

• Training employees to improve their skills

• Rewarding increased productivity with performance-related pay

• The division of labour

Profit is a surplus of revenue over costs. It is reward for

These are examples of other types of organization:

Total variable cost:

0 $4,000 0 $4,000 - 0 - $4,000

• The average cost of each unit of a good or service will tend

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