PRODUCTION AND

BUSINESS
ORGANISATION

PRODUCTION AND BUSINESS

ORGANISATIONS
We will study:

What is the production function?

How scales of production affect returns?

How technological change affects the production

function?

What is productivity
production function?

the

aggregate

What are different types of

organisations and how they function?

business

and

THE PRODUCTION
FUNCTION

What are different inputs to

produce some good?

The relationship between

the amount of input needed
and the amount of output
that can be obtained is
called
the
production
function.
Take the example of
generating electricity by
using different inputs.

THE PRODUCTION
FUNCTION
Here, our assumption is that firms always try to
produce efficiently.
What are two main techniques of production?
Capital-intensive
Labour-intensive
These techniques are part of the production
function.
Millions of different production functions one
for each and every product or service.

TOTAL, AVERAGE, AND

MARGINAL PRODUCT
What is meant by total product?
Total amount of output produced.
What is meant by marginal product?
Extra output produced by one extra unit of an
input, while keeping other inputs constant.
What is meant by average product?
Total output divided by total units of input.

PRODUCTIVITY AND AGGREGATE

PRODUCTION FUNCTION
What is meant by productivity?
The concept to measure the ratio of total
output to a weighted average of inputs.
Two Important Variants: Labour Productivity, which calculates the
amount of output per unit of labour.
Total Factor Productivity, which measures
output per unit of total inputs (typically capital
and labour).

PRODUCTIVITY GROWTH FROM

ECONOMIES OF SCALE AND
SCOPE
Recall two variants of productivity; what are
they?
Yes, they are labour productivity and Total
Factor Productivity.
Then, what is productivity growth?
The output growing faster than inputs.
Productivity grows due to tech. advances
(including process & product innovations) and
because of economies of scale and scope.

PRODUCTIVITY GROWTH FROM

ECONOMIES OF SCALE AND
SCOPE

Economies of scale and mass production have led

to productivity growth since the Industrial
Revolution.
For e.g., a large ship in 19th century could carry
maximum of 2000 tons of goods; today large oil
tankers carry over one million of oil,
A different kind of productivity arises out of
economies of scope.
Today, most PCs contain several additional
features, for instance, web page, word processing,
data sheet, presentations, etc.

FLIP SIDE OF ECONOMIES OF

SCALE AND SCOPE
Increasing scale and scope cannot increase output
endlessly.
As firms become larger and larger, problems of
management and coordination seep in.
In order to make maximum profit, a firm may
expand into several different business sectors, or
expand its business geographically.
This might lead to a phenomenon like great
empires face: Being crushed under ones own

weight.

BUSINESS ORGANISATIONS
The Nature of the Firm
In every type of economy, production function is
carried out by the business organisations, small,
medium and large.
Business organisations exist for many reasons,
but the most important is that they are specialised in
managing the process of production.
They perform the following important functions: Economies of mass production
Raising funds
Organising factors of production

BIG, SMALL AND

INFINITESIMAL BUSINESSES
Production in market economy takes place in firm.
30 mill different businesses in USA, but most of
them owned by a single person Ind.
Proprietorship.
Others are partnerships owned by two or upto
200 partners.
The largest businesses corporations. They
dominate in areas of sales, profits, assets, size of
payroll, employment, political and economic power.
Tiny businesses predominate in numbers; but their

THE INDIVIDUAL
PROPRIETORSHIP
Mom and Pop stores Family Businesses.
May do a daily business of a few dollars.
Tremendous efforts are needed to run these.
Working hours 50 or 60 hrs per week, almost no
vacations.
Average business life one year.
Still preferred by some.
There are a few success stories as well