1.2 Business economics

Production normally requires factors to work together: enterprise decides how land, labour and capital will be combined to create goods or services.

One product can pass through all three sectors: cocoa is grown in the primary sector, made into chocolate in the secondary sector, then transported and sold by tertiary businesses.

Employment share and output share can move differently: a highly productive sector may create substantial output with relatively few workers. State which measure the evidence describes.

If 135 workers produce 33,750 units per month, labour productivity is 33,750 ÷ 135 = 250 units per worker per month.

Better drainage can remove excess water from farmland, improve crop growth and raise output from the same area of land. Training can similarly raise output from the same number of workers.

Instead of each worker making a complete product, one may assemble, another paint and another inspect. Repetition allows each worker to focus on a narrower operation and the outputs then combine into the finished product.

Specialisation can increase output because repetition builds speed and workers avoid changing tools or stations. The gain depends on coordination and motivation, so extreme repetition can weaken the benefit.

At 2,000 units, TFC = $7,340 and TVC =$4,760, so TC = $12,100 and ATC =$12,100 ÷ 2,000 = $6.05 per unit. If revenue were$15,000, profit would be $2,900.

On a U-shaped long-run average cost (LRAC) curve, the downward-sloping section shows internal economies of scale as output rises and average cost falls. The lowest point is the output at which the business is most efficient because LRAC is minimised. Beyond it, the upward-sloping section shows diseconomies of scale.

Competition can also reduce profit, raise advertising or innovation costs, and force firms to close. Consumers may lose a valued supplier, while duplicated marketing or short-term cost cutting can weaken wider benefits.

The better size depends on the market. A large manufacturer can exploit high-capacity machinery, while a small accountancy or massage firm may benefit from trust, flexibility and personal service.

A successful club may use retained profit or borrowing to open a second location, spreading geographical risk; an airline may add hotels or packages to diversify revenue.

A maker of customised jewellery may deliberately stay small because each order needs personal attention and the niche has limited volume, even if current customers are profitable.

Dominance gives the firm substantial influence over price and output because customers have few effective alternatives and rival entry is difficult.

Barriers protect dominance by making entry costly, slow or legally impossible. With fewer effective substitutes, demand facing the firm is less constrained by rivals.

The consumer result depends on whether scale savings reach prices and quality, how contestable the market is, and whether regulation constrains abuse. Monopoly is therefore not automatically good or bad.

Because only a few firms hold much of the market, a price, advertising or product decision by one is likely to trigger a response from others. This strategic interdependence shapes competition.

Five branded petrol firms can form an oligopoly: each differentiates its offer, watches rival prices and may compete through advertising or price.

Outcome depends on whether firms compete independently, how strong entry barriers are, and whether regulators prevent cartels. A concentrated market can deliver innovation while still risking coordinated high prices.

If demand for wooden furniture grows, furniture producers may demand more woodcutters. If automated cutting machines replace their tasks, labour demand can fall despite product demand.

The two dimensions interact: many unqualified applicants do not solve a shortage of specialist engineers, while a few highly skilled workers may still be insufficient for large-scale production.

Education/training → stronger human capital → higher labour quality and productivity → potentially lower unit cost, better quality and greater labour demand.

A lower school-leaving age makes more young people eligible to work, shifting SL right; the new equilibrium has a lower wage and higher employment, assuming labour demand is unchanged.

Impact depends on union membership, bargaining power, business finances, labour demand and whether agreement is reached without prolonged disruption.

A renewable-energy subsidy can make cleaner power cheaper; a tax on a polluting product can reduce its demand; an emissions standard backed by fines can constrain firms that exceed the legal limit.

Judge effectiveness by asking: How large is the incentive or restriction? How responsive is behaviour? Can government observe and enforce it? What are the administrative, compliance and opportunity costs? Are there unintended distributional effects?

A policy is not effective merely because it exists. The best choice depends on the externality, information available and enforcement capacity; a coordinated policy mix may outperform any single instrument.

Blocking a takeover by a firm already holding a large market share may preserve independent rivals. Making taxi-market entry easier may increase availability and put downward pressure on fares.

The outcome depends on how far the wage floor exceeds equilibrium, the share of workers affected, labour-demand responsiveness, firms' ability to raise productivity or prices, and the time period.