1. IGCSE®/O Level Economics
4.2 Organization of production

2. Production
Goods and services are produced to satisfy consumers’ needs and wants
The production of goods and services is organized by entrepreneurs in firms
A firm combines land, labour and capital (inputs) to make goods and services (outputs)

3. Production adds value to resources
Production adds value to resources by turning them into goods and services consumers want and are able to buy.
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
Value added = profit + wages

4. 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

5. Aims of production Most private sector firms aim to maximize profit
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 benefit of their members. Any surplus of revenue over costs is used to reinvest in the organization or to lower prices
Public sector organizations provide public services, e.g. public health services, education
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.

6. 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.

7. 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.

8. Improving productivity
Same amount of inputs, same costs but more output = lower average cost per unit
Strategies to increase productivity include:
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

9. The division of labour
Increased labour productivity over time has been the result of the division of labour:
each worker specializes in one particular task or operation in a production process
Advantages
Disadvantages
It makes best use of an employee’s abilities
It reduces time spent by employees changing tasks
It allows greater use of machinery
It increases output
Carrying out the same task again and again may become boring
Workers may lack pride in their work because they do not see the final result of their efforts
Products become too standardized through mass production

10. Capital or labour intensity in production?
Labour-intensive production
Capital-intensive 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

11. Factor substitution 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

12. The costs of production
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

13. The costs of production (activity 4.12)
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
But, after a point, average costs may start to rise again if it becomes more difficult and expensive to increase output

14. 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

15. How to make it easier to break-even