IGCSE Economics: Production and Productivity

IGCSE Economics: Production and Productivity

Production

• Factors of production: land, labour, capital, enterprise.

Factors of Production are the resources land, labour, capital and enterprise utilized to produce a good or service.

There are four factors of production, which are:

• Land
• Labour
• Capital
• Enterprise

Land

These are the natural resources available to us. This not includes land space, but also space in the air, space in the sea, underground space, etc.

Capital

This is a man-made object used to produce other goods and services.

The most common example is machinery.

Increasing level of capital is also known as INVESTMENT.

Labour

This is both the physical and mental effort put into the production process.

Enterprise

This is the guy who takes risks and manages the Factors of Production. You know a lot of these guys, for example, Bill Gates

• Sectors of the economy: primary, secondary, tertiary.

Primary Sector

This step involves extracting raw materials, such as coal, oil, steel, etc. Someone who drills for oil or cuts down trees is known to work in the Primary Sector

Secondary Sector

Involves the transformation of raw materials into actual finished goods e.

g. Manufacturing aluminium into planes. A builder would work in the Secondary Sector

Tertiary Sector

This sector is more about providing a service, rather than manufacturing a good, to businesses and consumers. Examples include banking and teaching.

• Changing importance of these sectors in terms of employment and output over time in developing and developed economies.

Developing Countries

In these countries, the market is dominated by the Primary Sector.

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This is mainly because labor is often cheap in these countries, and the primary sector opens doors to more jobs and hence decreases unemployment

Developed Countries

The developed countries are now tending towards the Secondary and Tertiary Sectors. More education is generally available in these countries, so people have more opportunities to pursue jobs in the Tertiary Sector.

Productivity

What is it?

• Productivity refers to the amount of output that can be produced from a given amount of Factors of Production (FoP). (Calculated in a fashion very much alike to efficiency because productivity is basically the efficiency of production.)
• Since it is a ratio it has no units.

Increasing Productivity:

• Using the same amount of FoP to produce a greater amount of output than previously.

• Using a lesser amount of FoP to produce the same amount of output as previously.
• Etc.

• May mean lower average costs for the business and so potentially lower prices for the consumer.

• Means greater wealth for the local economy and the owners of the firm in question.
• Corporate taxes levied at the firm are based on net profit. Since a firm with higher productivity will necessarily have more profit, both the local economy and the firm will become wealthier.
• Speculation.

• Causes the Production Possibility Frontier to shift outwards because you now have the capacity to produce more.

How to increase the productivity of land:

• The use of fertilizers (farmland).

• Improve drainage and irrigation (farmland).

• Increased use of machinery (farmland).
• Use of GM crops instead of normal crops (farmland).

How to increase the productivity of labor:

• Division of labor (specialization).

• Training courses for workers.
• Improve the working conditions for workers to motivate them to work harder as this promotes the belief that the firm is concerned for the welfare of its workers and so the workers should be loyal to their firm and show their loyalty by working harder.

• Provision of financial incentives (profit sharing: a percentage of the annual profit is given to each worker as an addition upon what they would normally earn, calculate salaries directly from the units of output produced by each worker.) These give workers reason to work harder as the harder they work the more they will potentially earn. This also provides a source of peer pressure because if profit sharing is employed all the workers must work hard meaning that those who do not will be placed under pressure by their fellow workers to work harder.

How to increase the productivity of capital:

• Employ better machines.

• Upgrade software.
• Train operators.

• Use R&D to develop machinery and improve upon them.

Other knowledge:

• Enterprise is the FoP which organizes other FoPs and which takes risk.

• Sectors of the economy:
• Primary (agriculture, mining, logging.)
• Secondary (manufacturing of products, the processing of resources to make intermediate goods and capital goods that are employed in the manufacture of proper products.)
• Tertiary (provides services such as leisure or retailing.)

• The chain of production is the processes undergone in the production of a product (usually passes from the primary sector through the secondary sector and finally to the tertiary sector where it is distributed to consumers, although the tertiary sector is also seen to provide the primary sector in many cases with services such as banking and insurance.)

• Intermediate goods are not counted in a country’s GDP as that would mean double counting. Only final goods are counted.

• Intermediate goods are goods and not services.

• Intermediate goods include:
• Sugar.
• Steel.
• Plastic.
• Etc.