Production Theory Flashcards
(153 cards)
1
Q
What do you know about production
A
Production create goods and services consumed by the society and goods required to production of of other good. It involves transformation of inputs to outputs inform of goods and services to satisfy human wants or for producing other goods and services
2
Q
Name the production processes
A
Inputs, firm, and outputs
3
Q
Elaborate firm
A
Is an entity or organization that produces goods or provides services with the aim of making profit. It is assumed that the fundamental objective of the firm is to maximize profit
4
Q
Elaborate inputs in production
A
Are productive resources used by a firm to produce output of goods and services. Inputs are commonly known as factors of production that include land, labour, capital and entrepreneurship
5
Q
Elaborate outputs in production
A
Are goods or services produced by a firm
6
Q
What are the factors of production
A
Are inputs used in the production process. They are also known as Production resources/agents of production.
They are land, labour, capital and entrepreneurship
7
Q
What is land as a factor of production
A
In economics it comprises all natural resources used I production. It includes all that nature provides. Land is a factor of production where almost all kinds of productive economic activities are conducted
8
Q
Name the features of land as a factors of production
A
*land I a primary factor of production
*land differ in quality
*supply of land is fixed
*land is a passive factor of production
*land utilization is a derived demand
*the price of land is rent
9
Q
What are the factors affecting productivity of land
A
*quality of land
*means of irrigation
*proper use of land
*improved methods of cultivation
*usage with other inputs
10
Q
What are the two theories of pricing land
A
Ricardian theory of rent and Modern theory of rent
11
Q
Elaborate the ricardian theory of rent
A
It’s the oldest theory introduced by David Ricardo
It explains rent as a portion of produce of earth that is paid to the landlord in exchange for the use of the original and indestructible powers of soil
12
Q
What are the assumptions of ricardian theory of rent
A
*supply of land is fixed because it is a gift of nature
*rent arises because of inequalities in soil fertility
*land contains indestructible powers
*land is characterized with diminishing returns.[although the overall cost of production In each plot of land is the same, the yield from the plots with low fertility of land is low]
*land is the only factor of production that earns rent
*the most fertile land will be used first followed by less fertile land
*land has only one use of cultivation
13
Q
What is marginal land
A
Is the cost incurred on land based on the value of outputs produced. The higher the fertility the higher the rent and vice versa
14
Q
What are the criticism of ricardian theory of rent
A
*[rent is not derived solely when land I used for farming. Rent is not paid because of soil fertility but because of its scarcity]
*[Ricardo’s statement that the most productive land is cultivated first and followed by less fertile one I not supported with evidence. In practical the nearest land is cultivated first]
*[Ricardo’s concept of marginal land is idealistic because paying rent is not only for cultivated land, but also for various productive activities]
15
Q
Explain the modern theory of rent
A
Rent is a surplus that is not limited to rent it can arise with respect to any other factors of production. The demand and supply of land Is the main determinant of rent which is a reward for use of land thus in the market rent is determined at the equilibrium point where demand and supply intersect
16
Q
What is transfer earnings
A
The modern theory of rent also defines rent as a surplus which is the difference between actual an transfer earnings
17
Q
Define actual earnings
A
Is the price received by a factor for selling or supplying its services
18
Q
Define transfer earnings
A
Is the minimum amount of money that a factor of production can earn to keep it in it’s present use rather than in alternative use
19
Q
What do you know about quasi rent
A
According to Alfred Marshall rent is referred to as income derived from use of durable factors whose supply is fixed in the short-term period of production. Because durable factors are fixed in supply, when their demand increases such factors earn a surplus referred to as quasi rent
20
Q
Elaborate labour as a factor of production
A
Is a factor which includes the human mental ability and physical effort employed I production of goods and services
21
Q
Name the types of labour
A
Skilled, semi-skilled and unskilled labour
22
Q
Who are skilled labour
A
Consists of workers who use more mental effort in the production process. For instance doctors, teachers and lawyers
23
Q
Who are semi-skilled labour
A
They are workers who combine bothe physical and mental efforts in the production process. For instance shopkeeper, tax driver and waiter
24
Q
Who are unskilled labour
A
This type of labour constitutes workers who use more of physical effort than mental effort in production. For instance cleaners and janitor
25
What are the features of labour
*labour is inseparable from its labourer
*labour is a pershiable factor
*cost of producing labour cannot be determined
*labour is heterogeneous factor
*labour supply is inelastic in general
*labour demand is a derived demand
*labour is means as well as an end
*the reward or payment for labour is wage
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What is the productivity of labour
Is the production capacity of labour in a given period measured as output per unit labour. The higher the output per unit labour the higher the productivity
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What are the factors influencing productivity of labour
*hereditary, culture and individual qualities of a labourer
*the level of education and training of the labour
*working hours and wages that workers earn
*working environment
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What is the mobility of labour
Is the extent to which the workers are willing and able to move between jobs and across geographical areas
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Hint at the merts of mobility of labour
*it increases supply of labour
*helps to solve the unemployment problem and increases the income of workers when they move to places where they are required
*it enables labour to increase efficiency and productivity when used in better suited occupations
*enhances skills and experience of workers through on the job training
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What are types of labour mobility
Geographical and occupational labour mobility
31
Explain geographical labour mobility
Refers to the case at which workers can to relocate in order to find gainful employment that reflects their training and occupational interest. It is the movement of labour from one geographical are to another
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Explain occupational labour mobility
This refers to an ease with which workers can switch between different careers to find gainful employment or to meet their goal.
It helps to maintain strong employment and high levels of productivity
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Name the two types of occupational labour mobility
Horizontal and vertical mobility
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Elaborate horizontal mobility
This is the movement of labour from one employment without changing the worker's grading or position.
For instance when a nurse leaves his job in the hospital A to join hospital B in the same grade or position
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Elaborate vertical mobility
This is the movement of labour leading to change in worker's grading and status or occupation from a junior to a senior position
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Name the factors affecting mobility of labour
*the level of education and training
*improved infrastructure
*industrialisation
*political stability
*mind set
37
What is specialisation
Is an activity which involves splitting up the production process into its component parts. Thus, the task of producing a good is sub divided among workers as per their relative performances of such task
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Name the forms of division of labour
Simple, complex and occupational division of labour
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Explain simple division of labour
This occurs when production I split into different parts and many workers team up to complete production process
For instance in cloth manufacturing industries workers are categorized to perform various functions such as pattern making, cutting, sewing, printing, packaging and folding
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Explain complex division of labour
This occurs when the production process I split into different parts and a qualified person is needed to perform a specific part
For instance each secondary school teacher teaches specific subjects
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Explain occupational division of labour
This occurs when productionv of a commodity is specific to occupation of a worker. For instance the work of carpenter, medical doctor and farmers
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What are the advantages of specialisation and division of labour
*time saving
*increase in worker's skills
*increase in employment opportunities
*increase in use or employment of machine
*increase in work professionalism
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What are the disadvantages of specialisation and division of labour
*monotony
*risk of unemployment
*increase in dependence
*less creativity and mental development
*rising costs of inputs
44
Name the two forms of wages
Real and nominal wages
45
What is nominal wage
Is the amount of money income a labour receives for services it provides during the production process
It is also known as money wage
46
What is real wage
It refers as the purchasing power of the wage income earned by labour. It entails the basket of goods and services offered by labour out of its nominal wage
47
Name factors affecting real wages
*level of prices of goods and services
*amount of nominal wage for worker
*extra benefits to workers
*nature of the work
*future prospects
*social prestige
*working condition
48
Name the three systems of wage payment
-Time rate system
-Piece rate system
-Profit sharing system
49
Elaborate time rate system
Is the system whereby wage wage payment for a specific period. The wages paid depend on the time that a worker spends in producing goods or services. For instance daily payment, weekly or monthly
It I also called the flat rate system
50
Give the advantages of time rate system
*it increases efficiency of workers
*it reduces wage differentials
*it enhances the government in taxing the worker's income
*it facilitates formation of trade unions for workers with the same occupation
*it facilitates easy estimation of labour costs
51
Give the disadvantages of time rate system
*it has high cost of supervision and record keeping
*it may lead to low output
*it may make an employer to pay alot of money at once
*it is difficult to identify hard workers, since all workers with the same number of working hours are paid equally
52
What is piece rate system
This refers to the type of wage payment system in which a worker is paid according to work performed. The more work done the more the payment
Also known as payment by a result
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What are the advantages of piece rate system
*it reduce supervision cost
*it may result into increase in output
*it enables an employer to determine hard workers in the firm
*the system facilitates creativity and innovation during production
*it makes it easier to determine the wage rate
54
What are the disadvantages of piece rate system
*it creates difficulties for the government in imposing tax from income of workers
*it may lead to low quality products due to rushing in completing the work
*it is difficult to be applied in the case of tasks that are difficult to measure
*workers may be injured
*it may accelerate wage differentials among workers in the firm
55
What do you know about of profit sharing system
This refers to the type of wage payment system in which profit is shared among workers according to agreed rates. The level of wages varies among employees according to their salary scale
56
Name the advantages of profit sharing system
*increase in productivity
*reduction in labour turnover
*building team spirit among workers
*strengthens cordial relations between management and employees
*provides workers with additional income
57
Name the disadvantages of profit sharing system
*individual employees cannot see how their own work and actions impact on profitability of the company
*reduces individual performance
*uncertainty of profits
*profits may not be accurately shown by management
*inadequate incentives for those who work hard
58
Name six theories of wages
-Subsistence theory of wages
-Marginal productivity theory of wages
-Bargaining theory of wages
-Market(modern) theory of wages
-Wage fund theory
-Residual claimant theory
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What do you know about the Subsistence theory of wages
It is also known as iron law of wages
-It says that wages should be determined at the level sufficient enough to meet basic requirements of workers at mere minimum subsistence
61
Give the practical demonstration of subsistence theory of wage
If at any time, wage exceeds the subsistence income, workers will find themselves in good economic position. The situation may lead to an increase in birth rate which will increase population and consequently its supply of labour. This situation will continue until the wage falls to the minimum subsistence level of income. This apply situation apply in vice verse too
62
What are the assumptions of subsistence theory of wages
*wage is used to meet only basic needs of labourers
*all workers are paid the same wage rate at the subsistence level
*population is determined by the change in wage rate
*workers demand the same requirements, such as food, clothes and shelter
63
What are the criticisms of subsistence theory
*the theory was unable to explain the heterogeneity nature of wage rate[change in level of wages among workers that occur over a certain period of time]
*the theory explains wage determination by focusing on the supply side of labour and completely ignores the demand side
*the theory ignores efficiency and productivity of workers, since it assumes that all workers earn the same wage at the minimum subsistence level[in practical efficiency and productivity of workers differ]
*the subsistence theory of wages assumes wage is a determinant of population change[in practical it I difficult to explain the direct correlation between change in population and wage rate.]
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What do you know about marginal productivity theory of wages
The wage rate tends to be equal to the marginal product of labour. That is the higher the productivity of labour the higher the wage will be paid
- an entrepreneur will continue to employ workers up to the point where the marginal value product is equal to the additional cost of employing that additional worker
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What is marginal product
Is an additional output into the total product that results from the use of one additional unit of labour in production of goods and services
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What are the assumptions of the marginal productivity theory of wages
*perfect mobility of factors of production
*employers are able to predict the marginal productivity of a factor
*there is equal bargaining power between labour and the management
*there is perfect competition in the market and thus workers compete freely for jobs
*during the production process, labour can be increased or reduced and an employer can substitute one factor of production for another
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What are the criticism of the marginal productivity theory of wage
*the assumptions of perfect competition in both product and factor markets is rigid because under imperfect competition rewards for factors of production are unequal to the value of marginal product
*the theory ignores the role of labour unions in influencing on wage rate of workers
*the theory ignores the interrelated between wages and productivity or efficiency of workers, since the rise in worker's wage has a positive effect on productivity of labourers
*the theory does not explain the reward of factors of production used in fixed proportions.[when factors of production are used in fixed proportions an addition of one factor while other factors remain unchanged, will not lead to an increase in the total products thus the marginal product of the factor will be zero]
*productivity of labour does not only depend on the effort of labour but also on productivity of other utilized factors such as capital
72
What do you understand about wage fund theory
-Proposed by John Mill (1806-1873)
He explained the wage rate of workers depends on the proportion between capital available and the population. Thus, the workers wages are paid from the wage fund available for wage payment. According to this theory wage is determined by two factors wage fund and population
73
What is wage fund
This is the amount of capital that is set by an entrepreneur for direct purchase of labour services
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Elaborate population based on wage fund theory
It's the determines the labour force available for employment. A large numberr of workers implies a low wage rate and small number of workers implies a high wage rate
75
What is the formula of wage rate
Wage rate= population÷wage fund
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What are the assumptions of wage fund theory
*all workers are paid the same wage rate
*workers' wages are paid from a fixed amount of money set aside
*labour is homogeneous
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What are the criticisms of wage fund theory
*the theory's idea of fixed fund is unrealistic since nations pay wages out of the national income and not from a fixed fund set aside by entrepreneurs
*the theory does not explain wage differentials among workers.[in practical the wage rate among workers cannot be the same throughout the country]
*In practical labour is not homogeneous because workers differ in the level of efficiency and productivity
*the theory ignores the effect of productivity on wages
79
What do you know about bargaining theory of wages
The theory explains that wage is determined by the bargaining power of trade unions. This means that the wage rate paid to workers is determined by collective bargaining power of workers through their trade unions. Thus, if trade unions have high bargaining power, workers will have high wages
80
What are the role/ objectives of a trade union
*to improve the working conditions and wages of its members through bargaining
*to advice the government with regard to economic planning especially with reference to employment
*to protect members against unfair treatments by employers and ensure Job security of its members
*to ensure constant and persistent supply of labour force to employers
*to improve members' skills, for instance through seminars organized by trade unions
81
What are the approaches used by trade union to achieve its objectives
*through threatening to strike if demands are ignored
*through collective bargaining that involves peaceful negotiations between respesentatives of trade union and an employer about implementation of the trade union's demand such as wage increments and improvement in workers' conditions
*through sabotage that occurs when workers convince consumers not to buy the products produced by certain firms
*through compulsory arbitration, when their government gives out directives to both employer and employees on what should be done without taking sides
82
What are the determinants of the strengths of trade unions
*productivity of labour
*elasticity of demand for final product
*the size of membership
*government policy
*substitutablity of labour.[if the labour offered by a worker or members of the trade union is substitutable the strength of trade union tends to decrease and vice versa]
*scale of production
*economic or financial power
83
What are the circumstances under which workers demand for higher wages
*when the nature of work entails high risk
*when there is increase in the cost of living
*when there is an increase in labour productivity/efficiency
*when an employer is earning an abnormal profit
*when there are wage differentials among the workers in the industry
84
Elaborate supply of labour
Refers to the number of workers that would offer themselves for employment at each possible wage rate. Usually, the higher the wage the higher will be the quantity of labour supply
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What are the factors influencing the supply of labour
*population size
*number of working hours
*level of education and training
*labour's laws with regard to employment of children as well as women and attitude of the society on employment of women
*attitude of labour on work
*leisure and mobility of labour
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What do you understand on Residual claimant theory of wages
-It was proposed by Francis Walker
Payment for labour is a Residual after other factors of production are paid. Thus if labour puts more effort and increases output without increasing input of other factors the Residual amount that labour claims in form of wage will be increased
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What are the criticism of the Residual claimant theory of wages
*it lacks the positive method of determining what the level of rent, profit and interest would be.[it means that the theory does not specify the way of determining distribution of rewards of land, capital and entrepreneurship from total output]
*it does not explain the role of trade unions in changing wages
*a worker is not the Residual claimant rather it's the entrepreneur
*it ignores the influence of supply of labour on wages
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What is wage differentials
Refers to the differences in wages in various occupation or employments or grades of employments and also between different person in the same employment or grade
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What are the reasons for wage differentials among workers
*difference I levels of education and training
*level of experience of a worker
*productivity of a worker
*strength of a trade union
*factors influencing on demand for and supply of labour in the market
*regularity and irregularity of employment
*risk involved
91
What is the modern theory of wages
-This refers to demand and supply theory or Market theory of wages
Asserts that forces of demand and supply of labour in labour market determine wage. The demand of labour is a derived demand for instance the demand for clothes stimulates demand for labour to produce them
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What are factors affecting demand for labour
*price for labour
*productivity of labour
*substitutablity of labour
*government policy
*technical progress
*nature of demand for products produced by labour
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What are the assumptions of the modern theory of wages
*there is perfect mobility of labour
*there Is no government intervention in wage fixation
*there are many workers and employers in the labour market
*there is freedom of occupation.[which means that an employee can choose to work with any employer and an employer can choose to work with any employee]
*labour is homogeneous
94
What do you know about capital
Capital I human made resources such as machines, equipment and building used in production of goods and services. Since capital is owned by individuals, the owner earns income from use of capital in production
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Give practical examples of capital
Capital for a coffe farm includes a pair of scissors used in pruning, warehouse for storing coffee harvests, trucks for transporting the coffee and funds used to purchase land on which coffee is grown.
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Elaborate capital in relation to wealth
A person may use part of his or her wealth to purchase items used in production of goods or services.
For instance a person may decide to use part of his or her wealth to purchase a motor vehicle for business, such as providing taxi services. In such business the vehicle is used as capital that generates income to the owner. But if the vehicle is used for non-business activities lt is still part of an individual's wealth though it is not capital
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Elaborate capital in relation to money
Money is not a factor of factor of production unless it is used to acquire a stock of capital goods used in production. If a firm uses money to purchase a piece of land to produce commodities for profit then that amount of money used is referred to as capital. Similary money borrowed by a small scale enterprise to start business is also referred to as start up capital
98
Name the characteristics of capital
*capital Is a human made factor
*capital has elastic supply
*capital has a social cost
*demand for capital I a derived demand
*capital has easy mobility
*capital Is wealth
*the price of capital is interest
*capital Is a productive factor
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What are the types of capital
-Fixed capital
-Working capital/ circulating capital
-Money capital
-Real capital
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What are the advantages of capital
*it is used by a producer to produce goods or raw materials
*capital creates employment opportunities
*capital enhance acquisition of modern technology in production
*economic development is achieved mainly through using capital, such as machines, well development roads, improved agricultural tools and equipment and among other things
102
What do you know about classical theory of interest
It states that the rate of interest is determined by demand for capital and supply of saving. Interest paid to depositors is compensation for sacrificing current consumption for future consumption. The equilibrium level of interest rate is determined by the intersection of demand curve for capital and supply of saving
103
Name the four theories of price of a capital
-Classical theory of interest
-Loanable fund theory of interest
-Liquidity preference theory
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What are the assumptions of classical theory of interest
*households form thesupply side of capital(depositors) and producers(borrowers) form the demand side of capital
*idle capital doesn't exist in the economy cause capital is fully employed in factors of production
*no government intervention, for intervention will affect market forces and hence, equilibrium interest rate will not exist
*perfect competitive market, meaning both borrower and lenders are interest rate takers, which implies that powers of individual borrowers or lenders have no effect in determination of market interest rate
*capital Is mobile across industries
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What are the criticism of classical theory of interest
*assumption of full employment is unrealistic. I'm practice, there are idle resources in the economy
*the theory ignores changes in the income level. By assuming full employment, the theory ignores changes I income, which affect investment and saving
*the theory assumes that demand for loan depends on demands on demand for goods produced (derived demand), which leaves out the government, as it can also borrow
*the theory assumes that demand for capital ID determined only by the rate of interest. However, in practical the demand for capital may be influenced by other factors Such as profitability of businesses
106
What do you know about Loanable theory of interest
According to this theory, interest is determined by demand and supply of Loanable funds. The theory explains that interest is the price of credit determined by supply of credit or fund. Demand for loans is formed by governments, business person and consumers. Supply of Loanable fund Is formed private individuals and bank credit
107
What are the assumptions of Loanable fund theory
*perfect competitive market and hence, both borrowers and lenders are price takers
*perfect mobility of funds in the markets
*existence of dimishing returns such that expected return on capital increases at a decreasing rate as units of capital goods continue to be employed
*the theory uses partial equilibrium approach whereby demand and supply of funds determine interest rate, keeping other factors constant
*money supply is erogenous
108
Point out the criticism of Loanable fund theory
*in practice, money supply can be erogenous or endogenous and thus, the theory is based in favor of erogenous money supply
*perfect competition assumption is unrealistic because it is not always that borrowers and lenders are price takers, as sometimes a lender can be a price maker
*sometimes people save not only to earn interest, but also for other reasons, for example, for precautionary motives such as for unpredictable events like sickness
*the theory assumes that supply of Loanable funds is interest elastic, whereas in practice, supply of Loanable fund is fixed at a time and hence it is highly inelastic
*the assumption of perfect mobility of capital I unrealistic
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Who is an entrepreneur
Is a person with the capacity to organise other factors of production inorder to produce goods and services. He is the bearer of the risk and performs organizational functions of combining required factors of production. His reward is profit or loss
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What are the skills or qualities of an ideal entrepreneur
*the ability of organizing various factors of production effectively
*has to understand all aspects of a business undertaking
*has to be ready to bear the risk of uncertainty in the business
*his should be innovative by adopting to modern techniques of production
*he has to make the right decision at the right time by showing promptness
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Outline the roles of an entrepreneur
*has the role of coordinating and organizing other factors of production
*should take rise and they should be able to gage the risk
*should be an innovator
(has to seek for opportunities to increase business sales
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What are the factors that determine production
*availability of factor input
*state of technology
*size of firm
*price of factors of production
*political and social stability
*infrastructure
*market size
113
Name the four theories of profit
-Rent theory of profit
-Risk bearing theory of profit
-Uncertainty theory of profit
-Dynamic theory of profit
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What are trade unions
These are workers' associations with the main function of raising workers' wages and improve their working condition. They emphasize on collective bargaining and advocate for the same wages for workers of the same category in the industry
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What do you know about rent theory of profit
It was first introduced by Francis Walker
Walker saw profit as the rent of the least and most efficient entrepreneurs. The superior entrepreneur will earn more profit than the less efficient one. Hence, differences in profit arise due to different abilities of entrepreneurs
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What are the assumptions of the rent theory of profit
*existence of perfect competition, where all firms are assumed to have the same managerial ability
*profit is the wage for management ability
*profit aruse due to differential ability of entrepreneurs
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What are the criticism of rent theory of profit
*marginal entrepreneur ar non profit entrepreneur don't exist. An entrepreneur may be ineffective by other factors of production may still be efficient
*the theory fails to explain why firms make loss even with superior entrepreneurs
*the theory ignores the possibility that profit may be due to the entrepreneurs monopoly in the market
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What do you know about wage theory of profit
According to this theory, profit is determined as wage. In this regards, profit is type of wage for services rendered by the entrepreneur. The entrepreneur is superior kind of labour and the reward for the entrepreneurs service should be determined as wages are determined
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Outline the criticisms wage theory of profit
*profits are rewards for those who take risks. Workers on the other hand, do not take risks
*an entrepreneur takes responsibility for profit or loss, whereas reward for workers(wage) depends on contracts
*shareholders in different companies earn profit by virtue of their shapes, whereas workers have to undergo physical exertion in production to earn their wages
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What do you know about risk bearing theory of profit
It was introduced by Frederick Hawley
He argued that profit is a reward for those who are ready to take risk by investing their resources in business
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Hint at the criticisms of risk bearing theory of profit
*an entrepreneur makes profit not only because of taking risk but also due to efficiency and productivity of other factors of production
*the theory doesn't distinguish between insurable risk and non-isurable risk
*profit does not rise due to readiness of the entrepreneur in taking risk rather, a superior entrepreneur is able to reduce the risk
*it is not associated that higher risk I associated with higher profit
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What do you know about uncertainty theory of profit
Was proposed by Hyneman Knight
He argued that profit is a reward for uncertainty and not risk taking. The entrepreneur gets profit for bearing uncertainties and not for risk taking because risk can be foreseen or predicted
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Name the two kinds of risk according to uncertainty theory of profit
Foreseeable and unforeseeable risk
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Point out the criticism of uncertainty theory of profit
*uncertainty is not the only factor that is faced by the entrepreneur, but there are factors that entrepreneurs have to consider and address
*uncertainty bearing is not like other factors of production. Rather, it is a psychological concept
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Elaborate dynamic theory of profit
Was advanced by John Clark
He advocated his belief that profit arises In a dynamic economy not a static on. The world and economic circumstances are always changing. Hence, a clever entrepreneur who will foresee these changes and produce accordingly
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What are the criticisms of dynamic theory of profit
*it fails to differentiate between change that is foreseen and one that is unforeseen
*dynamic changes give rise to profit only when such changes and their consequences are unpredictable
*the theory does not mention profit as a reward for risk taking
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Define the term scale of production
Refers to the quantities of output produced by a firm relative to input usage
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What does scale of production consist of
*the size
*number of plants
*technique of production used by a firm in production
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What are the two categories of scale of production
*large scale and small scale production level
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Give insights of large-scale of production
Is a firm that invests in huge plants and machinery to produce goods and services using large quantities of factors of production is considered to be operating under a large production
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Give insights into small-scale production
A firm that produces goods and services by using small quantities of factors of production. Eg handicrafts, tailoring and photography
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What are the differences between large-scale and small-scale production
*quantity of factors of production used
*earn profits
*enjoyment of the economic of scale
*size of goods produced
*technique used
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What is a production function
Is a mathematical expression of technical relationship between quantities of inputs and output used in production. This function specifies the firm's output for all combinations of factor inputs typically capital and labour
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What are the three ways that production function can be presented
-As a function(mathematical form)
-As a tabular(schedule) form
-As a graph
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Explain total product (TP)
This is the quantity of outputs produced by a firm by combining fixed and variable factor inputs. In short run period factors such as capital remain fixed and thus total product is determined by the variable factors
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What is the average product (AP)
Is the quantity of outputs per unit of the variable input used In production
AP= units of labour÷total product
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What do you know about marginal product (MP)
MP of a variable factor measures additional units of output produced by an additional unit of a variable factor input. Or is an extra output producedbas a result of employing an extra unit of variable factor of production
MP= change In units of labour÷change in total product
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Elaborate law of dimishing returns
It states that as more of variable input is employed on fixed factor total output increases first at an increasing rate and later at a decreasing rate until a point Is reached where additional quantities of input will yield diminishing returns assuming all other factors are kept constant
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What are the assumptions of law of diminishing returns
*the state of technology I assumed to remain constant
*there must be only one variable factor input and other factors remain fixed
*all units of variable factors are identical
*the law operates in the short-run period of production only
140
Explain the stage 1 production according to the law of diminishing return or take off stage
TP increases at an increasing rate up to point B (which is the end of stage 1), which means that the AP also increases and the MP increases up to its maximum level but then starts to fall. MP is higher than AP, MP>AP. TP&AP are increasing. The AP is at maximum level at the point where MP curve intersects the AP curve from above
Firms In stage 1 will experience increase of OP&IP. A firm will not make loss as it increases the use of labour but underutilisation of production capacity imply a firm has potential to increase output
141
Elaborate stage II or maturity stage or rational stage or feasible region of production according to dimishing returns law
In this stage TP increases at a dimishing rate until it reaches its maximum point at C(the end of stage II) while both AP&MP are decreasing, but still positive. Here the MP=0. MP zero when TP is at maximum level, while AP shows a steady decline throughout this stage. Here MP
142
Explain the stage III or stage of negative return of production according to dimishing returns law
In this stage TP falls, the AP shows a steady fall but never becomes zero though the MP becomes negative. Rational producer will never choose to operate in stage III because the MP of the variable factor is negative
143
What do you know about returns to scale
Is a long long run concept in production theory where output can be increased by varying all factor inputs.
It states that *when all factor inputs are increased in the same proportion, output may increase either by the same proportion, the greater proportion or less proportion than the factor input*
144
List the functions exhibited by returns to scale
s>1,the function exhibits increasing return to scale
s<1,the function exhibits decreasing returns to scale
s=1,the function exhibits constant returns to scale
145
Explain increasing returns to scale
Proportionate increase in all factors of production results in a more than proportionate increase in output
For instance if increase of inputs by 1% results to an increase in output by 2% there is increasing returns to scale in production
146
Explain constant returns to scale
This occurs when a given proportionate increase I all factor input lead to the same proportionate increase in production
For instance if inputs are increased by 1% and result to an increase in output by 1% then the firm is said to experience constant returns to scale
147
Explain decreasing returns to scale
This occurs when a proportionate increase in all factor inputs leads to less than proportionate increase in output
For instance if the inputs are increased by 1% but output increases by less than 1% a firm is said to experience decreasing returns to scale
Initially output shows increasing returns, then it doubles, to to suggest a case of constant returns to scale, which is followed by the case of decreasing returns to scale
148
What do you know about economics of scale
In the long-run, when scale of production is increased, the firm economies of scale. The term *economies* refers to advantages. Therefore, economies of scale refers to advantages of large-scale production
149
What are the two categories of economies of scale
Internal and external economies
150
Elaborate internal economies of scale
These are advantages realized by a firm from internal factors when it expands its scale of production. For instance use of greater degree of division of labour and specialized machinery at higher levels of output is referred to as internal economies
151
Hint at the internal economies of scale
*technical economies
*managerial economies
*financial economies
*risk bearing economies
*economies of research
*economies of welfare
*labour economies
*advertising economies
*purchasing economies
152
Explain external economies of scale
These are advantages which accrue to firms as a result of expansion of output of the whole industry rather than the output of individual firms
153
Hint at the external economies of scale
*economies of concentration
*economies of information
*economies of disintegration
*cheaper raw material and capital equipment
*technological external economies
*growth of ancillary industries
