1. Try to reconstruct the text using key words and word combinations listed above.

2. Answer the following questions to the text.

1. What are the three stages of production?

2. What is the difference among extraction, manufacturing and assembly?

3. How can we distinguish producer goods and consumer goods?

4. Where shall we classify agricultural products?

5. Convenience products are mostly bought on impulsive base, aren’t they?

6. What is the difference between direct and indirect services?

7. Which stage of the product’s life cycle is the most profitable for the firm?

8. How can you explain the difference between tangible and intangible products?

9. Can you identify the quality dimensions in the order of priority?

10. Is quality of a product uniform throughout the world?

Economies of scale

Mass production techniques such as the division of labor, use of complex machinery and assembly line are most effective in large operations. How large a firm must be before it pays to use such methods varies from case to case. But when a firm reaches that size, economists say that it can begin to enjoy the economies of scale - a reduction in costs resulting from large-scale production.

Firms enjoy economies of scale for the following reasons:

• They can afford to use the full benefits of the division of labor.

• They can buy in quantities that often entitle them to discounts on raw materials.

• They can afford to purchase specialized machinery and equip­ment to reduce unit costs (costs per item).

• They can afford to invest in research and development programs which enable the company to reduce production costs and produce new and improved products.

Productivity

Productivity is a measure of how efficiently we work. To measure productivity, economists determine the amount of goods and services produced for every unit of input. Input can be any resource that goes into the production process.

Productivity is usually measured in terms of output per worker per hour.

The nation's productivity is directly affected by each of the following:

• The quality of the labor force.

• The quality of the machinery and other capital equipment.

• The effectiveness with which resources are used.

• Business conditions.

The Quality of the Labor Force. Among the principal ingredients of productivity are the education and training of workers. Well-educated and skilled workers perform their tasks more efficiently than those who are unskilled or poorly educated. It follows that labor productivity can be increased by:

1. Improving the quality of education and training programs;

2. Increasing opportunities for people to receive education and training that suits their needs.

Another ingredient in productivity is the enthusiasm workers have for their jobs. Those who like their jobs and feel they gain dignity and respect from the work will produce more than those who lack motivation to do their best.

The Quality of Machinery and Capital Equipment. Better machinery is often said to be the best way to increase productivity. When machines are used, power is not limited by human strength but comes from other sources, such as coal, gas, oil, or even atomic power.

New technologies - changes resulting from the use of new machinery and methods - can be used by business to improve productivity. The development of micro-computer and its application to business problems, for example, has increased the productivity of thousands of businesses.

To use machinery efficiently, producers must also use division of labor - the practice of breaking down large, complex tasks into a series of small ones so that each worker can become an expert in his particular task.

By narrowing the focus of their production, business firms and geo­graphic regions become expert at what they do. This enables them to reduce costs. Since lower costs enable everyone to live better, specialization raises living standards. However, specialization also makes us more dependent on one another for the things we need.

Using the Resources Effectively. The factors of production can be combined in any number of ways, some more efficient than others. When they are combined efficiently, productivity will be relatively high. When they are combined inefficiently, productivity will be relatively low. Decisions about combining the factors of production rest on management.

In the production process, for example, it is management's responsibility to acquire the necessary capital (in the form of machinery, tools and equipment). Similar, management must hire and train the firm's labor force and motivate the workers to do the job. In other words, managers must employ both capital and labor to maximize productivity.

Another way to increase productivity is to let workers participate in designing and improving the production process. Profit sharing and stock ownership also motivate workers. This is exactly what many companies now do. It has been found that workers with a stake in the firm's welfare work smarter because they get part of the profits when productivity increases.

Business Conditions. There are times when business conditions in general are very good, and others when they are poor. These periodic ups and downs in the economy, known as the business cycle affect productivity. When the economy slows down, sales decline. This leads retail stores to reduce the size of their inventories and postpone adding new lines of merchandise. For similar reasons, when business is poor, wholesalers and manufacturers reduce their inventories and production levels to cut costs.

Although business firms can reduce the size of their inventories and production levels at will, they are often reluctant to lay off workers. Some fear that if business suddenly improved, they might not be able to replace their experienced staff. Others may be concerned about the impact of a layoff on their employees and their families. In other instances union restrictions may prevent employers from laying off workers as quickly as they might otherwise prefer.

Whatever the reason, keeping workers longer than called for by business conditions results in reduced output per worker or, to put it another way, a decline in productivity.

When times are good, the opposite occurs. Employers are able to employ the optimum (best) number of workers, and productivity increases.