6.01 Analyze cost/profit
relationships to guide
business decision-making.
6.00 UNDERSTAND ECONOMICS
TRENDS AND COMMUNICATION.
5-161 5-164 DEFINITIONS
Specialization of labor:
 People work at one part of the assembly or service
 The person becomes an expert and very efficient at
doing the work
Specialization by trade or profession
 Specialization by stage of production:

Division of labor:
 Specialization by task (a particular part of a job)
DEFINITIONS
Depth of jobs:
 Defined as the amount of control you have over the
tasks that you do
Low depth: There are strict guidelines you must follow,
and you make very few decisions.
 High depth: You follow general guidelines and set your
own pace.

Scope of jobs:
 Defined as the number of different operations you
do on the job and the frequency with which you do
them

The lower your task level, the lower the scope of the job
Low scope: The job is to put doors on cars on an assembly line.
 Higher scope: The job is to put doors on cars, put seats in cars,
and check the steering mechanism.

SPECIALIZATION
Describe how resources are involved in
specialization.
 Natural resources: We locate businesses where they can
be the most successful (e.g., ski lodge in the mountains
close to the slopes, orange groves in states with warm
climates.
 Capital goods: Specialized capital goods contribute to
increased production (e.g., use of robots on assembly
lines).
 Human resources: This occurs when people use their
different skills and abilities in jobs for which they are
best suited. People should do what they do best so that
the most goods and services can be produced.
SPECIALIZATION
Identify forms of specialization of human resources.
 Describe specialization by trade or profession.


This is the type of work you perform to earn a living (e.g.,
teachers, farmers, doctors, plumbers, artists, etc.).
Describe specialization by stage of production.

This form occurs when more than one state of production is
needed to change a raw material into a finished product. The
process of making the best use of labor resources in the
production of goods and services



One person assembles the parts of a car door another person
attaches it to the car frame, another checks it for proper
movement
Adam Smith – straight pins
Describe specialization by task.

This form occurs when jobs are so specialized by a worker
does only one small part of the total job (e.g., in a textile mill,
one worker cleans wool, another spins it into yarn, another
dyes the yarn, and another weaves it into a woolen fabric).
SPECIALIZATION
Explain the relationship between the depth and
scope of a job.
 The depth of the job measure a worker’s control
over how a job is done
 The scope of a job refers to how many parts of the
assembly or service the worker is responsible for
performing
Describe the advantages of specialization.
 Simplified worker training
 Increased employee interest and satisfaction
 Increased production rates
 Increased level of skill
 Increased quality of work
 Ease of transferring to a similar job
SPECIALIZATION
Explain the disadvantages of specialization.
 Increased interdependency
 Increased boredom on the job
 Decreased pride in work
 Decreased morale and enthusiasm for the job
 Increased chance of obsolescence because of
technological advances
 High degree of specialization may cause difficulty
transferring or obtaining another job
SPECIALIZATION
Describe ways to overcome the disadvantages of
specialization
 Job enlargement: Management may combine job tasks
to restore wholeness (e.g., instead of limiting
salespeople strictly to selling merchandise, their jobs
may be enlarged to help with displays, restocking
merchandise, etc.).
 Job rotation: Managers may also rotate employees
periodically so that they learn new job tasks and see
how their old tasks relate to the new tasks.
 Job enrichment: Managers add interest to a task to
increase a job’s depth, allowing workers to make more
decision, set their own pace, and supervise others.
 Job satisfaction: Managers may ask for and use
employee suggestions; allow flexible or alternative work
schedules; praise work well done; and provide cash
incentives, contests, and bonuses.
5-165 5-166 LABOR VOCABULARY
Labor union: Group of employees (can be in
different companies) that do much the same kind of
work or are in the same industry that often
participate in collective bargaining. A labor union is
an organization of wage earners or salary workers
established for the purpose of protecting their
collective interests when dealing with employers.
http://www.referenceforbusiness.com/small/IncMail/Labor-Unions.html#ixzz1gdBQO0Yu
 Local: The union in that particular company or
area
 National: The headquarters of the whole union

LABOR VOCABULARY
Federation: A group of unions or labor
organizations that are in some way coordinated
or connected. Adds more power to the union
because other unions will support an “action.”
 Collective bargaining: consists of negotiations
between an employer and a group of employees so
as to determine the conditions of employment.
The result of collective bargaining procedures is a
collective agreement. Employees are often
represented in bargaining by a union or other
labor organization.

LABOR VOCABULARY


Strikes: A work stoppage on the part of the union
Picketing: Method employed to raise awareness of the
cause, protesters usually carry signs
http://www.wisegeek.com/what-is-a-picket.htm





Boycotts: Stopping the buying of a company’s products,
a strike tool
Featherbedding: Adding workers that aren’t needed to
protect jobs (coal man on a diesel train)
Lockouts: Company action to stop workers from coming
to work
Injunctions: Legal action to stop an action on the part
of the company or the union
Strikebreakers: People hired to replace union workers
LABOR UNIONS

Identify reasons that labor unions form.



A means of collectively bargaining with employers for
fair wages and decent working conditions
Workers feel unfairly treated by management or the
owners
Identify types of labor issues.
Safety (working conditions, hours, training, unsafe
materials or equipment)
 Fair pay (company is making lots of money but pays
poor wages)


Classify types of unions.
Craft – skilled laborers (carpenters, electricians, etc)
 Industrial – workers in the same industry regardless
of skill

LABOR UNIONS

Describe levels of union organization.
National – headquarters of all the locals
 State – headquarters for the locals within a single state
 Local – Regional (think city or part of a city, county)







IN-PLANT LOCAL
 a union local restricting membership to one specific workplace, working
for one particular employer
CITY-WIDE LOCAL
 a union local whose jurisdiction is the named city
COUNTY-WIDE LOCAL
 a union local whose jurisdiction is the named county
STATE-WIDE LOCAL
 a union local whose jurisdiction is the named state
PROVINCE-WIDE LOCAL
 a union local whose jurisdiction is the named province
REGIONAL-LOCAL
 a union local whose jurisdiction is the named region
Shop (plant, firm, company)
 Members (rank and file)
http://xpdnc.com/moreinfo/glossary.html

LABOR UNIONS

Describe types of union organization.

CLOSED SHOP


UNION SHOP


any employee can be procured from any source and once hired,
the employee is required to maintain union membership in
order to maintain employment
AGENCY SHOP


all employees are supplied by the labor union exclusively,
typically through the hiring hall, and are required to maintain
union membership in order to maintain employment
any employee may or may not belong to the union
organization, yet all employees are required to pay dues and
other fees for the package of services supplied by union
organization
OPEN SHOP

any employee voluntarily belong to the union and may
voluntarily pay dues and other fees to the union organization
LABOR UNIONS

Describe the collective bargaining process.

The company management team negotiates with
union representatives and then puts the agreed upon
contract proposal before the membership for
ratification

If ratified, the contract becomes the new work rules, pay
and benefits for the selected time
Collective bargaining is governed by federal and state
statutory laws, administrative agency regulations,
and judicial decisions. In areas where federal and
state law overlap, state laws are preempted.
http://www.law.cornell.edu/wex/collective_bargaining


Explain types of union negotiation strategies.

Sick-out, walk-out, boycotts, picketing, strike, work
slow-down
LABOR UNIONS

Describe types of management negotiation strategies.


Tying concessions to important give-backs, lockouts, hiring
strike breakers, injunctions
Explain the effects of unionism on workers.
Workers pay a membership fee and agree to let the company
and union negotiate terms of employment and pay
 A level of protection from poor managers


Describe the effects of unionism on businesses.
Can negotiate with a few people rather than each employee
 Costs tend to rise, but so can productivity
 Economists who study unions—including some who are
avowedly pro-union—analyze them as CARTELS that raise
wages above competitive levels by restricting the SUPPLY of
labor to various firms and industries.
http://www.econlib.org/library/Enc/LaborUnions.html

5-167 5-169 DEFINITIONS
Stages of production:
 Primary production involves the extraction of raw
materials (e.g. coal, iron, agricultural commodities). Raw
materials can be:
Extracted – e.g. coal, iron ore, oil, gas and stone
Harvested / collected – e.g. fish
 Grown – e.g. timber, cereal crops



Secondary production involves transforming raw materials
into goods. There are two main kinds of goods:
Consumer goods – e.g. washing machines, DVD players. As the
name implies, these are used by consumers
 Industrial / capital goods – e.g. plant and machinery, complex
information systems. Industrial and capital goods are used by
businesses themselves during the production process


Tertiary production is associated with the provision of
services (an intangible product). Firefighters, taxis drivers,
lawyers, bankers.
http://tutor2u.net/business/gcse/production_stages.htm
DEFINITIONS

Theory of production: an effort to explain the
principles by which a business firm decides how
much of each commodity that it sells (its
“outputs” or “products”) it will produce, and how
much of each kind of labour, raw material, fixed
capital good, etc., that it employs (its “inputs” or
“factors of production”) it will use.
http://www.britannica.com/EBchecked/topic/477991/theory-of-production

Production function: The production function
relates the output of a firm to the amount of
inputs, typically capital and labor. Keep in mind
that the production function describes
technology, not economic behavior.
http://www.econmodel.com/classic/terms/prodfcn.htm
DEFINITIONS
Increasing returns: Adding resources or workers
will result in an increasing ratio of product
(marginal return)
 Diminishing returns: Adding resources or
workers will result in an decreasing ratio of
product (marginal return)
 Law of diminishing returns: When increasing
amounts of one factor of production are employed
in production along with a fixed amount of some
other production factor, after some point, the
resulting increases in output of product become
smaller and smaller. (Tomato/fertilizer example)

http://www.auburn.edu/~johnspm/gloss/diminishing_returns_law_of
DEFINITIONS

Law of variable proportions: states that as the
quantity of one factor is increased, keeping the
other factors fixed, the marginal product of that
factor will eventually decline.
http://www.trcollege.net/articles/92-law-of-variable-proportions

Marginal product negative returns: in all
productive processes, adding more of one factor of
production, while holding all others constant, will
at some point yield lower per-unit returns
Samuelson & Nordhaus. Microeconomics. 17th ed. page 110. McGraw Hill 2001
DEFINITIONS

Marginal cost: The marginal cost of an additional unit
of output is the cost of the additional inputs needed to
produce that output.
http://www.econmodel.com/classic/terms/mc.htm

Total revenue: The revenue received by a firm for the
sale of its output. Total revenue is one two bits of
information a firm needs to calculate economic profit,
the other is total cost. In general, total revenue is the
price times quantity--the price received for selling a
good times the quantity of the good sold at that price.
http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=total+revenue

Marginal revenue: The change in total revenue
resulting from a change in the quantity of output
sold. Marginal revenue indicates how much extra
revenue a firm receives for selling an extra unit of
output. It is found by dividing the change in total
revenue by the change in the quantity of output.
http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=marginal+revenue
PRODUCTION

Explain the stages of production.

In Stage I, marginal product is positive and
increasing. In Stage II, marginal product is positive,
but decreasing. And in Stage III, marginal product is
negative.
http://glossary.econguru.com/economic-term/stages+of+production
Stage I - companies will see increased productivity, or output,
with each addition of a non-fixed variable. For example, if the
fixed variable is property, a non-fixed variable might be the
addition of new employees.
 Stage II - This is the stage that all companies strive for. Here,
a business will be able to optimize its output. Economists say
this is stage in which "rational" firms should operate.
 The last stage of production is where the economic
phenomenon referred to as "the law of diminishing returns"
appears.

http://www.ehow.com/list_6366891_stages-production-economics.html#ixzz1gifAcKCk
PRODUCTION

Describe the impact of the law of diminishing returns
on production decisions.


More work and resources result in less production per unit
Explain how total revenue and marginal revenue are
used to determine the amount of output that will
generate the most profit.
Total revenue is all the income generated by selling the
products the company makes
 Marginal revenue is how much money an additional item
will produce after it is sold.



Marginal revenue helps the company calculate whether to
make a few more items
Marginal revenue is the extra revenue generated when a firm
sells one more unit of output. It plays a key role in the profit
maximizing decision of a firm relative to marginal cost.
http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=marginal+revenue
TOTAL REVENUE AND MARGINAL REVENUE

The marginal revenue received by a firm is the
change in total revenue divided by the change in
quantity, often expressed as this simple equation:
marginal revenue = change in total revenue
change quantity