Production Costs and Revenue
4.1 Production and Productivity
● Production converts inputs such as the services of factors of production from capital
and labour into final output. This will satisfy consumer needs and wants.
● Productivity is calculated by output per worker per period of timer
● Being more productive means the same input such as the number of workers
produces more output over the same period of time
● Being less productive required a larger input to produce the same quantity of output
● Productivity can be increased by training workers or using more advanced capital
machinery
● Being more productive also lowers the average costs per unit of output
4.2 Specialisation, Division of Labour and Exchange
● Specialisation occurs when each worker completed a specific task in a production
process. The concept was famously stated by Adam Smith, who showed how,
through the division of labour, worker productivity can increase. Firms can then take
advantage of increased efficiency and lower average costs of productions.
● An extract from the “Wealth of Nations Adam Smith”
“To take an example, therefore, from a very trifling manufacture; but one in which the division of
labour has been very often taken notice of, the trade of the pin-maker; a workman not educated
to this business ... could scarce, perhaps, with his utmost industry, make one pin in a day, and
certainly could not make twenty. But in the way in which this business is now carried on, not only
the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater
part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it,
a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two
or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is
even a trade by itself to put them into the paper; and the important business of making a pin is, in
this manner, divided into about eighteen distinct operations, which, in some manufactories, are all
performed by distinct hands, though in others the same man will sometimes perform two or three
of them... But though they were very poor, and therefore indifferently accommodated with the
necessary machinery, they could, when they exerted themselves, make among them about twelve
pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size.
Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a
day.”
, ● Smith essentially said that by dividing the production of pins into 18 different tasks
the output of pins could increase significantly. Each worker specialises and output
increases.
● Specialization can be achieved by individuals, businesses, regions of countries or
countries themselves
Advantages:
★ Higher output and potentially higher quality since production focuses on what people
and businesses are best at
★ There could be a greater variety of goods and services produced
★ There are more opportunities of economies of scale so the size of the market
increases
★ There is more competition and this gives an incentive for forms to lower their costs
which helped to keep prices down
Disadvantages:
❏ Work becomes repetitive which could lower the motivation of workers, potentially
affecting quality and productivity. Workers could become dissatisfied.
❏ There could be more structural unemployment since skills might not be transferable
especially because workers have focussed on one task for so long
❏ By producing a lot of one type of good through specialization variety could in fact
decrease for consumers
❏ There could be a higher worker turnover for firms which means employees become
dissatisfied with their jobs and leave regularly.
Specialisation in the Production of Goods and Services to Trade:
● Countries can specialise in the production of certain goods. For example Norway is
one of the world's largest oil exporters. Countries rade to get the goods and services
they are unable to produce
● Countries can exploit their comparative advantages in a good which means they can
produce a good at a lower opportunity cost to another
● Absolute advantage occurs when a country can produce more of a good with the
same factors inputs
Advantages:
- Greater world output so there is a gain in economic welfare
- Lower average costs since the market becomes more competitive
- There is an increased supply of goods to choose from
- There is an outward shift in the PPF curve.
Disadvantages:
- Less developed countries might use up their non-renewable resources too quickly so
they might run out
4.1 Production and Productivity
● Production converts inputs such as the services of factors of production from capital
and labour into final output. This will satisfy consumer needs and wants.
● Productivity is calculated by output per worker per period of timer
● Being more productive means the same input such as the number of workers
produces more output over the same period of time
● Being less productive required a larger input to produce the same quantity of output
● Productivity can be increased by training workers or using more advanced capital
machinery
● Being more productive also lowers the average costs per unit of output
4.2 Specialisation, Division of Labour and Exchange
● Specialisation occurs when each worker completed a specific task in a production
process. The concept was famously stated by Adam Smith, who showed how,
through the division of labour, worker productivity can increase. Firms can then take
advantage of increased efficiency and lower average costs of productions.
● An extract from the “Wealth of Nations Adam Smith”
“To take an example, therefore, from a very trifling manufacture; but one in which the division of
labour has been very often taken notice of, the trade of the pin-maker; a workman not educated
to this business ... could scarce, perhaps, with his utmost industry, make one pin in a day, and
certainly could not make twenty. But in the way in which this business is now carried on, not only
the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater
part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it,
a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two
or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is
even a trade by itself to put them into the paper; and the important business of making a pin is, in
this manner, divided into about eighteen distinct operations, which, in some manufactories, are all
performed by distinct hands, though in others the same man will sometimes perform two or three
of them... But though they were very poor, and therefore indifferently accommodated with the
necessary machinery, they could, when they exerted themselves, make among them about twelve
pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size.
Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a
day.”
, ● Smith essentially said that by dividing the production of pins into 18 different tasks
the output of pins could increase significantly. Each worker specialises and output
increases.
● Specialization can be achieved by individuals, businesses, regions of countries or
countries themselves
Advantages:
★ Higher output and potentially higher quality since production focuses on what people
and businesses are best at
★ There could be a greater variety of goods and services produced
★ There are more opportunities of economies of scale so the size of the market
increases
★ There is more competition and this gives an incentive for forms to lower their costs
which helped to keep prices down
Disadvantages:
❏ Work becomes repetitive which could lower the motivation of workers, potentially
affecting quality and productivity. Workers could become dissatisfied.
❏ There could be more structural unemployment since skills might not be transferable
especially because workers have focussed on one task for so long
❏ By producing a lot of one type of good through specialization variety could in fact
decrease for consumers
❏ There could be a higher worker turnover for firms which means employees become
dissatisfied with their jobs and leave regularly.
Specialisation in the Production of Goods and Services to Trade:
● Countries can specialise in the production of certain goods. For example Norway is
one of the world's largest oil exporters. Countries rade to get the goods and services
they are unable to produce
● Countries can exploit their comparative advantages in a good which means they can
produce a good at a lower opportunity cost to another
● Absolute advantage occurs when a country can produce more of a good with the
same factors inputs
Advantages:
- Greater world output so there is a gain in economic welfare
- Lower average costs since the market becomes more competitive
- There is an increased supply of goods to choose from
- There is an outward shift in the PPF curve.
Disadvantages:
- Less developed countries might use up their non-renewable resources too quickly so
they might run out
