Firm and Industry

Back to: ECONOMICS SS1

 

Welcome to class! 

In today’s class, we will be talking about the firm and industry. Enjoy the class!

Firm and Industry

At the end of the lesson, you should be able to;

• Define a firm, plant, and an industry
• Analyse the difference and similarities between a firm, plant, and an Industry
• Calculate the total product, average product, and marginal product of a given firm.

A Firm

A firm is an independently administered business unit capable of carrying out production, construction or distribution activities. A firm may be small or large depending on capital outlay and the level of production.

An industry is defined as the combination of two or more firms coming together to produce broadly similar commodities with the motive of maximizing profits.

A plant is defined as an establishment for the production of goods and services. It includes the factory building with the large machinery installed in the factory building and the team of workers employed for production processes.

Factors that determine the size of a firm

The size of a firm at any moment can be explained by the nature of the constraints facing and limiting the rate at which it can grow and expand. These constraints are outlined as thus:

1. Financial Constraint – inadequate funds affect the size of a firm
2. Nature of Business – some businesses, going by their nature cannot be expanded in size
3. Marketing Constraint – the extent of demand for the products determines the size of a firm
4. Managerial Constraint – difficulties in the effective management of the business can affect its size
5. Risk-Bearing Constraint – ability to face the risk challenges involved in the business by the owner can affect the size of a firm
6. Labour Factor Constraint – the availability of labour determines the size of a firm
7. Technical Constraint – lack of technical knowledge required can affect the size of a firm

Concepts of total, average and marginal products

1. TOTAL PRODUCTIVITY (TP):- This refers to the overall quantity of a commodity derived from a given quantity of productive resources.
2. AVERAGE PRODUCTIVITY / OUTPUT (AP):- This is the output per unit of the variable factor employed. This is derived by dividing the total output by the number of men or capital employed.   Mathematically, it is represented as                   Average Output = Total Product / variable factor (number of men)
3. MARGINAL PRODUCTIVITY ( MP): – This is the addiction to total product brought about by the employment of an additional unit of the variable factor. It is derived mathematically as M.P. = Change in TP / Change in Variable factor

Table for total, average and marginal productivity

The productivity concept can be better explained with reference to the table of the Law of Diminishing Returns below.

Unit of Land ( Fixed factor )	No of Men Employed      (Variable factor )	Total Product	Average Product	Marginal Product
4 Hectares	1	15	15	15
4 Hectares	2	32	16	17
4 Hectares	3	54	18	22
4 Hectares	4	72	18	18
4 Hectares	5	85	17	13
4 Hectares	6	90	15	5
4 Hectares	7	84	12	-6

From the table above, the TP when four (4) men were employed was 72 units.

From the table above, the (A.P) at the variable factor of six (6) workers is 90 / 6 = 15

From the table above, the MP at a variable factor of five (5) is calculated as

MP = (85-72) /(5 – 4) = 13/1 = 13

Evaluation

1. Briefly explain the three concepts of productivity.
2. State the formula for calculating the marginal product.

Relationship between total, average and marginal products

The relationship between Total Product (TP), Average Product (AP) and Marginal Product (MP) can be demonstrated by a graph as follows

Graph for total, average and marginal products

TP, AP and MP rise initially. TP rises sharply and curves at a maximum point when MP is zero.  TP declines when MP = 0 and after the horizontal line of the x-axis, MP assumes a negative value

Evaluation

1. Define the following productivity concepts

a) Total production

b) Variable product

c) Marginal Product

2. Why is the MP curve always below the AP

Reading assignment

1. Amplified and Simplified Economics for SSS by Femi Longe Chapter 5  Pages 63-70
2. Fundamentals of Economics for SSS By R.A.I. Anyanwuocha Chapter 12 Pages 103 – 105

General evaluation

1. Define scarcity.
2. Write the formula of the range.
3. List five importance of scale of preference.
4. What are factors that determine the size of a firm?
5. Explain the term economies of scale.

Weekend assignment

SECTION A.

1. What is Average Product? A. TP/ MP     B.  MP x AP      C.    TP / Number of workers (Labour)      D. TP x MP
2. The shape of the TP Curve from the graph is usually the A. Highest B. negative   C.   lowest    D. constant
3. What is the total product?   A. total output    B. average production    C. total cost   D.   average cost
4. Another name for the law of diminishing returns is………… A. law of supply   B. law of average    C. law of fixed factors   D.  law of variable proportions.
5. Copy and complete the table below

Unit of land	No of Men Employed	Total Product	Average product	Marginal Product
1	1	1	1	–
1	2	6	3	5
1	3	20	6.7	E
1	4	35	C	15
1	5	40	8	5
1	6	A	7	2
1	7	42	6	F
1	8	40	5	-2
1	9	B	D	-4
1	10	27	2.7	G

a) Calculate the estimated missing letters A-G

b) How many men were employed when marginal output is at the maximum?

Draw the graph of the completed table showing the TP, AP, and MP. (The use of a graph sheet is necessary)

 

In our next class, we will be talking about Business Organization.  We hope you enjoyed the class.

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