1. 4.2 Organisation of Production
IGCSE Economics
4.2 Organisation of Production

2. Learning Outcomes
Describe what determines the demand for factors of production
Distinguish between labour-intensive and capital intensive production
Define productivity
Recognise the difference between production and productivity
Describe the principle of profit maximisation as a goal and recognise that business organisations may have different goals

3. 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
A firm combines land, labour and capital (inputs) to make goods and services (outputs)

4. Adding Value Value Added = Selling Price – Cost of production
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 = Selling Price – Cost of production

5. Chains of Production
As businesses tend to specialise in a particular type of activity, a product will go through a Chain of Production to reach the final consumer. Each business involved will Add Value

6. Organising production

7. Profit = Total Revenue – Total Costs
Aims of Production
Most private sector firms aim to maximize 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.
Profit = Total Revenue – Total Costs
Do businesses only want to make a profit?
What other types of objectives might a business have?

8. Other Business Objectives…
Survival
Increasing Market Share
Increasing Brand Loyalty
Improving Customer Satisfaction
Environmental Objectives
Ethical Objectives
Innovation
Growth
What objectives might these businesses have other than profit maximisation?

9. Some Key Terms Production Productivity Competitiveness Efficiency
What do each of these terms mean? Can you explain any differences between them or links between them?

10. Efficiency, Productivity and Competitiveness
Production is the total amount made by a business in a given time period.
Efficiency is about making the best possible use of resources. Efficient firms maximise outputs from given inputs
Productivity measures how much each employee (or other input) makes over a period of time.
By improving efficiency and productivity a business can reduce its costs and improve its competitiveness.

11. Question
If the Cadbury factory increases it’s weekly production by 20,000 chocolate bars a week, does this mean it has increased productivity?

12. Labour Productivity
Labour productivity is the most commonly used measure of factor productivity.
Do businesses want each of these measures to increase or decrease?

13. A real example – Fiat-Chrysler in 2010
In Italy, 22,000 Fiat workers spread across five assembly plants make about 650,000 cars a year.
In Fiat’s huge Brazilian factory, just 9,400 workers turn out around 750,000 cars.
At its Polish plant 6,100 workers turn out 600,000 cars.
Chrysler has 50,000 workers in ten factories in America, Canada and Mexico turning out 1.6m cars.
For each calculate:
Average product of labour
Can you suggest an explanation for the differences?
2. What other information would you need to be able to work out the average labour cost per unit of each?
3. Which do you think would have to lowest labour cost per unit?

14. Task – Production Activity
In groups of 4 or 5 you will make boxes. You will decide within your groups how to organise your production You will see how many boxes you can produce in 5 minutes You will then get a chance to review before having another 5 minutes to see if you can improve your productiviy

15. Record your results in a table like this:
Session 1
Session 2
Number of Items Produced
Total Revenue
Average Labour cost per unit (assuming workers get paid $2 each per session)

16. Key Questions How did your group organize production tasks?
What issues caused productivity to be low in the first session?
Did your group manage to improve productivity for the second session? How?
How could productivity be further improved?

17. Factors Affecting Labour Productivity
Skill of Workers
Motivation of Workers
Availability of Equipment
Production method
Quality of management
What could a business do to improve these following factors in order to improve labour productivity?

18. The importance of Productivity
Same amount of inputs, same costs but more output = lower average cost per unit
Why is it so important that firms reduce their average costs?

19. The Division of Labour

20. 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

21. Task
Watch the video ‘The division of labour – Wilson Football factory’
What are the advantages and disadvantages of the division of labour?
Think about this from the perspectives of the workers, the business and customers

22. The division of labour 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

23. Capital Vs Labour Intensive Production

24. Capital Intensive Vs Labour Intensive
Labour-intensive production
Capital-intensive production
What will determine whether a firm uses labour or capital intensive production?

25. Factors determining demand of capital and labour
The nature of the task
Mass market vs differentiation strategy
how much output consumers demand
the cost of labour relative to the cost of employing capital
the productivity of labour relative to capital
What might make a business decide to substitute workers for machinery? (factor substitution)

26. Factor Substitution Will all jobs be done by robots in the future?
Factor substitution is the substitution of capital for labour in production processes as:
Innovation – Availability of new technologies
Reduced capital costs – Falling prices of capital
Increasing labour costs – Increasing wage rates making labour relatively expensive compared to capital
Will all jobs be done by robots in the future?

27. Labour Intensive Capital-intensive
‘Capital’ refers to the equipment, machinery, vehicles and so on that a business uses to make its product or service.
Capital-intensive processes are those that require a relatively high level of capital investment compared to the labour cost.
These processes are more likely to be highly automated and to be used to produce on a large scale.
Capital is a long-term investment for most businesses, and the costs of financing, maintaining and depreciating this equipment represents a substantial overhead.
In order to maximise efficiency, firms want their capital investment to be fully utilised
In a capital-intensive process, it can be costly and time-consuming to increase or decrease the scale of production.
‘Labour’ refers to the people required to carry out a process in a business.
Labour-intensive processes are those that require a relatively high level of labour compared to capital investment.
These processes are more likely to be used to produce individual or personalised products, or to produce on a small scale
The costs of labour are: wages and other benefits, recruitment, training and so on.
Some flexibility in capacity may be available by use of overtime and temporary staff, or by laying-off workers.
Long-term growth depends on being able to recruit sufficient suitable staff.
Labour intensive processes are more likely to be seen in Job production and in smaller-scale enterprises.

28. Plenary
Loop Cards
Can you complete the loop within 60 seconds?