MrGoff.com Production - GCSE Economics

The role of producers

Producers make and supply products to the market. They might be individuals, firms or in some cases the government. The aim of most producers is to make a profit.

Individuals might be sole traders that own and operate their own small business. Many tradespeople are sole traders.

Most production is from firms. They can range from small local firms to large multinational corporations.

The government also provides a range of services including health, education and emergency services. In the past the UK government also made things with stakes in Rolls Royce and British Steel among others. Some countries governments are still producers of goods.

The importance of production and productivity for the economy

Production is the level of output of a firm, industry or country in a certain period of time. Productivity is the amount of output per unit of input i.e. it measures the efficiency of production in terms of the resources that went into creating it. Although they are related they are not the same thing.

Increasing production brings a range of benefits for the economy such as:
* Increased employment unless it is caused by gains from automating tasks
* More profit from firms as they have more to sell
* Economic growth which is measured as an increase in output
* A rise in standard of living as consumers have more products to buy and if the rise was not from automation more money to buy them with

If not properly managed growing production can also lead to diseconomies of scale, discussed further down this page. These can lead to additional costs for producers

Productivity can be measured as total output/total inputs. It tells you how efficiently you are using your resources. A firm can improve its productivity in a number of ways including:
* Using better quality inputs can mean less faults occur
* New or improved machinery can allow you to produce more in the same time
* Training your staff can make them more efficient
* By specialising staff may be come more skilled and so more efficient
* Encouraging staff to come up with small efficiency improvements in the roles they are most familiar with

If you can produce more with the same amount of resources you lower your average costs. The use of the word average is important here. If you are producing more you will need more raw materials and it is likely your total costs will have gone up but as you have also made more it is your average costs that have gone down. A further reduction in those average costs may come about as the increased levels of raw materials you deal with may lead to economies of scale. We discuss these at the bottom of this page. With lower costs firms may choose to lower prices making them more competitive both locally and internationally. If they export more this will be good for the country's economy.

The increased profits that result from increasing productivity mean firms are more able to invest. This includes investing in people to increase their skills. Higher skilled workers tend to lead to higher wages which lead to increased spending and growth.

If higher wages and higher output are achieved then the government will make more money from taxes. This can be used to improve the standard of living in the country. An increase in exports is also good for the country's balance of payments which we talk about more in the second half of the course.

Revenue, costs, profit and loss

Financial term	How it's calculated	Description
Total cost	Total cost = Fixed costs + Variable costs	Businesses have costs that are the same regardless of their level of output e.g. they must pay the rent on their premises regardless of how much they produce. These are known as fixed costs. There are also costs that vary depending on the amount of production. You need more raw materials the more you produce. These are known as variable costs. Total cost is the total of both your fixed and variable costs.
Average costs	Average costs = Total costs/No. of products made	Average costs are sometimes called unit costs because they represent the cost to produce one product.
Total revenue	Total revenue = No. of products made X price	Total revenue is the amount of money that was made buy selling our products.
Average revenue	Average revenue = Total revenue/No. of products made	Average revenue does not really need to be calculated because it is the same as the price unless we sell our product at different prices to different people like say a bus company with student and pensioner discounts.
Profit or loss	Profit or loss = Total revenue - Total costs	If total revenue exceeds total costs then we have profit. If it is less then we have a loss. If they are the same it is known as breaking even.

The importance of revenue, costs, profit and loss for producers

Costs

The most essential thing about costs is that they are lower than revenue. Some firms may be prepared to accept they will make a loss for the first few years they operate but it is not viable long term. It may surprise you to know that many large firms that are now household names took years to turn a profit e.g. Google took 3 years, Facebook 5 years and Tesla 10 years.

Firms always seek to keep costs down. The lower their costs the more they are willing to supply at each price. Lower costs also mean either the firm makes more profit or is able to lower its prices to better compete.

Revenue

Revenue is essential to the long term survival of a company. As mentioned in costs, it may be OK for it to take a little while for revenue to pick up.

Growth in revenue also sends positive signs to investors. With more investment the firm can grow in size. It's also essential for the other source of investment - loans. Lenders will want to see a strong and stable stream of revenue so that they can feel confident the loan will be repaid. This may include suppliers who supply us with goods we pay for later.

It also creates stability for the company. Without it workers may fear for their futures and start to look for other opportunities. It might also be hard to find business partners or get good terms from suppliers if they are not confident in the company's future stability.

Profit

Maximising profit is the ultimate goal of most businesses. If you are making large profits it signals that this is a firm that uses its resources efficiently. This attracts further investors.

Strong and consistent profits send positive signals to all 3rd parties to the business such as workers, suppliers, lenders, and investors.

Profits can also be used to reinvest into a business and allow it to grow and prosper.

Loss

As previously alluded to, losses may not be a massive problem in the early days of a business as long as it is building its customer base and working towards profitability. It may also come about due to one-off or extraordinary events. However it happens, losses cannot go on long term.

Internal economies of scale

Internal economies of scale are advantages that firms can get by growing in size.

Type of economy of scale	Description
Technical economies	As firms grow they are able to afford more specialist equipment such as mechanising aspects of production. A process like this is prohibitively expensive for small firms.
Purchasing economies	As a firm grows in size they need to buy more of the supplies they use. Buy buying things in greater bulk it is often possible to negotiate a lower price.
Marketing economies	Larger firms can afford more expensive types of advertising like tv and national newspapers and may therefore reach more customers.
Financial economies	A large firm is likely to have more assets and higher revenue and profit and so will find it easier to secure financing for projects and will be offered better rates than a small firm because of this.
Managerial economies	In small firms one individual may have to fulfil multiple roles for the firm. Larger firms are able to hire specialist leaders for certain areas such as finance, marketing or personnel. These specialists are more efficient in their roles.
Purchasing economies	As a firm grows in size they need to buy more of the supplies they use. Buy buying things in greater bulk it is often possible to negotiate a lower price.
Specialised workers	Workers that are used in a partially mechanised process repeat the same tasks over and over making them very efficient.
Diversification	This is where a larger firm might be able to produce a wider array of products. Because a firm has more products they are less dependent on any one product. So if one product fails they still have money coming in from the others. This allows them to experiment and then shift resources towards the products that succeed.
Research and development	large firms are able to invest more into research and development to help them come up with new and innovative products to attract more customers..
Shipping economies	Due to the fact that shipping containers are in standard sizes and about 2m tall but sold on the area they cover on a ship or train not their volume, it means that doubling the size of a container will quadruple it's size. This gives an advantage to large firms who may require a lot of shipping either of parts or of their product to market.

External economies of scale

External economies of scale refer to advantages that are available to any producer in a region or country.

Type of economy of scale	Description
Infrastructure	Better roads, rail, and air transport means faster more reliable deliveries which reduces costs for firms.
Education partnerships	Access to research and development partnerships with universities can benefit both small and large companies. The UK has a very strong tertiary education sector and many industries cluster near some of the top universities.
Business clusters	A business cluster is an area where there is a concentration of firms of a certain industry and their suppliers. This allows firms to benefit from shared expertise and collaboration as well as reduced transport costs as suppliers are so nearby.
Special locations	Some regions or places become synonymous with certain types of businesses. If a region has a good reputation within a certain industry it will attract other firms from the same industry.

Diseconomies of scale

It may seem like growth is always positive and every firm should always be striving to grow. However, there are problems that can arise for firms as they increase in size. These are known as diseconomies of scale.

Type of diseconomy of scale	Description
Communication issues	As the firm grows lines of communication can become stretched. More communication is written than face to face and this can mean increased communication problems leading to inefficiency.
Loss of control	As a firm grows in size there are more people employed. This either means managers need to look after a larger number of employees which can have a demotivating effect, as employees feel more isolated, or the firm has to hire more managers which may wind up costing them more.
Technical limits	You can't just keep adding resources and expect them all to have the same effect e.g. A restaurant may find they are able to serve more customers by having 2 chefs on than 1. This does not mean they can expect 10 chefs to be able to serve 10 times as many people. Sooner or later the new chefs will get in each others way. Plus there will be a limited number of cooking surfaces.

Knowledge check

Questions:

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Question text

Exam style questions

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Questions

Explain how the government can be considered a producer. (2 marks)

The government provides services(1) e.g. education, health services, prisons, citizens advice etc.(1) Allow any suitable example.

In economics, what is meant by production? (2 marks)

Production is the total output of goods and services(1) of an individual, firm or country in a certain time period.(1)

In economics, what is meant by productivity? (2 marks)

Output(1) per unit of input(1) or

A measure of the efficiency(1) of the use of the factors of production.(1)

Explain what average cost is and how it is calculated. (2 marks)

Average cost is the cost of producing a single product.(1) It is calculated by total costs/no of products made.(1)

Explain what total revenue is and how it is calculated. (2 marks)

Total revenue is the total amount of money an individual or firm makes from selling their goods and services.(1) It is calculated by Price x No of items sold.(1)

Explain the difference between profit and loss. (2 marks)

Profit is when total revenue exceeds total costs.(1) A loss is when total costs exceed total revenue.(1)

Case study/Scenario

In the UK worker productivity has been steadily growing since the 1990s.

Analyse how UK firms benefit from increased productivity (6 marks)

Sample answer:

An increase in productivity means greater output per worker{AO1} This means lower average costs for firms who can decrease the prices of their products{AO2} making them more competitive and increasing in the demand for their products.{AO3a} This leads to an increase in revenue and increase in profit for these firms.{AO3a}

They can then use these profits to reinvest in their companies perhaps by attracting workers with higher skill sets through better pay or by investing in machinery{AO2} which would lead to further growth in the future.{AO3a}

Case study/Scenario

Allied Bisuit has been suffering from low productivity and low sales and their profits have fallen for three year in a row. Kirk thinks that the low productivity is down to high worker turnover in recent years and thinks the solution is to spend money on worker training and increase wages to help retain experienced workers. Luann disagrees with him and thinks they need to replace the obsolete machinery with new more efficient machines. Kirk is worried about the cost of replacing the machinery.

Evaluate the importance to Allied Biscuit of making a profit. (6 marks)

Sample answer:

Profit provides Allied Biscuit with a cheap source of internal funding{AO2} that can be used to fund things like training or new machines to increasing productivity{AO3a} and lead to further growth for Allied Biscuit.{AO3a} If Allied Biscuit needs to borrow money to fund their plans then profit will be a signal to Banks about their ability to repay{AO3b}. With their declining profits they may be limited in what they can borrow or they may be charged a higher rate limiting profits{AO3b}

Profits are always going to be important in the long term for a business. If Allied Biscuit still has the money to fund its ideas to turn around productivity and start to make a profit then it is a less urgent concern than if they will require funding from a Bank that may not be too keen to take the chance as in the long run if they don't make a profit they will go out of business.{A03b}

Additional notes:
Make sure you are in context. Mention the plans from the scenario.

It's a tricky evaluate question as it's another were you wouldn't say its not important. So here you are really trying to get to the bottom of the reason for it and the chances of getting back into profit. This gives you the extent to which it is important.

The concluding statement should say when it is most important.