What does production mean in economics ?

1/ Producing means producing added value

 

2/ Market or non market production ?

 

3/ Companies play a major role in the creation of added value

1/ Producing means producing added value

Production = the processes and methods used to transform tangible inputs (raw materials, semi-finished goods, subassemblies) and intangible inputs (ideas, information, knowledge) into goods or services. Resources are used in this process to create an output that is suitable for use or has exchange value.

ADDED VALUE

= the increased worth that a business creates for a product

 

= The difference between what a business pays its suppliers and the price it charges

 

 

= an amount added to the value of a product or service, equal to the difference between its cost and the amount received when it is sold. Wages, taxes, etc. are deducted from the added value to give the profit.

 

 

When economists make a number of simplified assumptions about how the economy, or some part of it, behaves, and then see what this implies in various different scenarios. This is modelling.

how to calculate added value ?
Turnover
minus
intermediate consumptions (expenditures)
=
Added value

this AV is used to pay the production factors / Factors of production

  • Labour factor
  • capital factor

capital factor = MONEY or assets put to economic use, the life-blood of CAPITALISM. Economists describe capital as one of the four essential ingredients of economic activity, the FACTORS OF PRODUCTION, along with LAND, LABOUR and ENTERPRISE.

Production processes that use a lot of capital relative to labour are CAPITAL INTENSIVE; those that use comparatively little capital are LABOUR INTENSIVE.

Capital takes different forms. A firm's ASSETS are known as its capital, which may include

  • fixed capital (machinery, buildings, and so on)
  • and working capital (stocks of raw materials and part-finished products,
  • as well as money, that are used up quickly in the production process).
  • Financial capital includes money, BONDS and SHARES.


Labour factor
One of the FACTORS OF PRODUCTION, with LAND, CAPITAL and ENTERPRISE.

Among the things that determine the supply of labour are the number of able people in the POPULATION, their willingness to work, labour laws and regulations, and the health of the economy and FIRMS.

DEMAND for labour is also affected by the health of the economy and firms, labour laws and regulations, as well as the PRICE and supply of other factors of production.

So
Added value
minus
wages
= PROFIT
= revenues for capital owners
especially the share holders

2/ Market or non market output ?

MARKET PRODUCTION

Free market is a system in which decisions regarding resource allocation, production, and consumption, and price levels and competition, are made by the collective actions of individuals or organizations seeking their own advantage through profit.

In all market economies, however, freedom of the markets is limited and governments intervene occasionally to encourage or dampen demand or to promote competition to thwart the emergence of monopolies. Also called free economy, free market, or free market economy.

 

NON MARKET PRODUCTION
In economics, nonmarket forces are those acting on economic factors from outside the market system. They include societal institutions and organizations – economic, political, social and cultural – seeking a collective interest, such as solidarity. The non market organizations don't seek their own adavantage through profit.

Non market forces could include services of:

general public services of national defence, of compulsory social security;
social welfare, hostels, tourist offices, employers’ and professional associations, economic organisations provided by general government;
recreational and cultural activities provided by general government (entertainment’s, sports grounds and clubs, libraries, public archives, museums, botanical and zoological gardens);
education provided by general government and private non-profit institutions;
research and development provided by general government and private non-profit institutions;
health provided by general government and private non-profit institutions;
social welfare, hostels, tourist offices, trade unions, employers’ associations, religious organisations and learned societies, political parties, consumers’ and civic organisations etc. provided by private non-profit institutions; recreational and cultural activities (entertainment’s, sports grounds and clubs, libraries, public archives, museums) provided by private non-profit institutions
domestic services.

3/ The firms: major actors of the market economy

Let's take the example of Nike...

Does Nike produce  high or  low added value outputs ?

Write a short answer to this question by using as many notions as you can :

  • outputs
  • goods
  • services
  • turnover
  • intermediate conumptions
  • factors of production
  • labour
  • capital
  • wages
  • profit
  • labour intensive / capital intensive
  • price
  • production costs / costs of production
  • added value
  • outsourcing
  • maketing
  • logo
  • brand

Ongoing battle between the sneakers giants

 

  • what was the turnover of Adidas and Nike in 2006?
  • How could you compare them ?
  • what is the percent change in turnovers of Nike and Adidas between 2006 and 2016?
  • What is the multiplying factor between turnovers of Nike and Adidas in 2016?