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【DSE Econ】Firms and production最齊精讀|囊括所有背書內容【懶人包】

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相信有選修Econ的同學都知道Firms and Production這一課是最多內容需要背誦的課題。


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Public ownership

Firms owned by the government are called public enterprises. They are under public ownership.

There are two major forms of public ownership:

Public ownership

Government departments

Public corporation


A unit of governmental organization.

A firm which is wholly owned by the government,

but it is not a unit of governmental organization but is incorporated by the statute.



The government

The government

Managed by  

Government officials.

A board of directors appointed by the government.  


Mostly civil servants.

Most are non-civil servants.

Financed by

The government.

Financially independent of the government.


To provide public services for a low or no price.

To provide specific public services according to commercial principles.


Water Supplies


Department/Hong Kong Post

Airport Authority/Hong Kong

Science/Technology Parks



Private ownership

Firms owned by private individuals are called private enterprises. They are under private ownership.

There are two major forms of private ownership, owners who bear unlimited liability and owners who bear limited liability.

Unlimited liability  

Limited liability

Sole proprietorships


Limited companies:

²  Private limited companies

²  Public limited companies

    (Listed companies)


Unlimited liability

It means that owners’ liability is not confined to the amount of their investment in the firm, meaning that they may have to use their own assets or personal property to repay the debts that the firm incurs.

Limited liability

It means that owners’ liability is confined to the amount of their investment in the firm, meaning that they don’t have to use their own assets or personal property to repay the debts that the firm incurs.  

Legal entity

A firm that is a legal entity has an independent legal status, it has a separate legal existence from its owners, and assumes all responsibilities, meaning that:

  1. the firm can own property, make contracts, and engage in lawsuits under its own name.
  2. the firm is fully responsible or its debts
  3. the firm can continue to exist irrespective of ownership transfer, bankruptcy, or death of its owners.

If a firm is a legal entity, its owners bear limited liability.

If a firm is not a legal entity, its owners bear unlimited liability.


Summarized features of the four types of private enterprises


Unlimited liability 

Limited liability 

Sole proprietorship 


Private limited company 

Public limited company 

Number of owners 


1 – 50 


Legal status 

Not a legal entity 

A legal entity 


Lack of continuity 

Lasting continuity 

Set-up procedure 

Simple and cheap 

Complicated and expensive 

Sources of capital 





Separation of ownership and management 



Specialization in management 





Willingness to improve efficiency 



Flexibility in decision making 




Relationship with employees and customers 



Disclosure of financial accounts 

No need to disclose 

No need to disclose 

Need to disclose 

Transfer of ownership 


Need consent 

Need consent 


Profit tax rate 




Sole proprietorship vs Partnership

Sole proprietorship

It has only one owner and the owner is called a sole proprietor.


It has two or more owners, and the owners are called partners.


Sole proprietorship



1.     Simple and inexpensive set-up procedure

2.     No separate legal status

3.     Unlimited liability

4.     Lack of continuity

5.     No separation of ownership and management

6.     Stronger incentive to improve efficiency

7.     Closer relationship with employees and customers

8.     No need to disclose financial accounts

9.     Lower profit tax rate (than private and public limited company)



1. Source of capital

Narrower source of capital

Wider source of capital

2. Scope of specialization

Narrower scope of specialization

Wider scope of specialization

3. Decision-making

Higher risk but more flexible in decision making

Lower risk but less flexible in decision making

4. Transfer of business

Freely transferable

More difficult to transfer its business

5. Sharing of costs, risks and profits

More difficult to transfer its business

Partners can share the costs, risks, and profits


Private limited company vs Public limited company

Limited companies

They are private enterprises whose owners bear limited liability. The owners of a limited company are called shareholders.


Private limited company

Public limited company


1.     Complicated and costly set-up procedures

2.     Separate legal status

3.     Limited liability  

4.     Lasting continuity

5.     Separation of ownership and management

6.     Higher profits tax rate



1. Number of owners

1-50 shareholders

1-unlimited number of shareholders

2. Issue of shares

Can issue shares but cannot invite the public for subscription

Can issue shares and can invite the public for subscription

3. Transfer of shares

Need to seek approval from the board of directors

Shares are freely transferable

4. Disclosure of financial accounts

No need to disclose its financial accounts to the public

(Need to submit its audited annual financial accounts to the

Companies Registry.)


The financial accounts are then available and disclosed to the public


Shares and bonds


A certificate of ownership issued by a company which entitle its holder to a share of the company’s profits.


A certificate of debt that entitles its holder to earn interest until redemption on the maturity date.

Comparison between shares and bonds




Roles of holders

Owners of a company

Creditors of a company

Voting rights of holders

Usually have voting rights at shareholders’ meetings

Do not have voting rights at shareholders’ meeting

Feature of returns

1.     Shareholders receive dividends

2.     Dividends may not be distributed

3.     Dividends vary with the e company’s profits and dividend


1.     Bondholders receive interest

2.     Interest must be paid

3.     Interest is usually fixed, whether the company earns a

profit or not, interest has to be paid

4.     Lower risk due to stable return


No maturity dates

Redeemed on maturity dates

Priority in getting back capital upon liquidation

Shareholders are the last to get back their capital

Bondholders can get back their capital before shareholders


Comparison between issuing shares and issuing bonds


Issuing shares

Issuing bonds

Interest burden



Redemption obligation



Debt-to-equity ratio

Decrease, as it is easier to borrow new loans

Increase, as it is more difficult to borrow new loans

Influence on the company’s decisions

New shareholders may influence the company’s decisions and the existing shareholders’ control right over the company is diluted

Bondholders have no influence on the company’s decisions

Risk of being taken over


No influence



Comparison between buying shares and buying bonds


Buying shares

Buying bonds

Voting rights



Rate of return

May have a higher rate of return if the company earns more profits


Yet, a lower rate of return may be resulted if the company earns less profits or even suffer losses

May have a higher rate of return if the company earns less profit or suffer losses


Yet, a lower rate of return may be resulted if the company earns a lot of profit

Priority in getting capital refund upon liquidation

Lower priority than bondholders

Higher priority than shareholders

Risk of investment

Higher risk due to unstable income

Lower risk due to stable income


Priority of payment upon liquidation of a limited company

Secured creditors (e.g., the bank with its mortgage) →Liquidator→Government and employees→Unsecured creditors (e.g., bondholders)→Shareholders

Classification of outputs


Tangible outputs of production.

  • Examples: books, food, drinks


Intangible outputs of production.

  • Examples: transportation, banking

Consumer goods

Goods used to directly satisfy human wants.

  • Examples: textbook bought by students for acquiring knowledge

Producer/capital goods

Goods used to help (further) production.

  • Examples: textbooks used by teachers for teaching

Private goods

Rival(rous) in consumption: one’s consumption of the good would reduce the amount available for others’ consumption.

Excludable in consumption: one can exclude or prevent non-payers from consuming the good at an affordable cost.

  • Examples: apples sold in a market

Public goods

Non-rival(rous) in consumption: one’s consumption of the good would not reduce the amount available for others’ consumption.

Non-excludable in consumption: it is very costly to exclude or prevent nonpayers from consuming the good.

  • Examples: fireworks displayed in public area


Types of production

Primary production

Activities which extract or directly use natural resources.

  • Examples: mining, fishing, farming

Secondary production

Activities which turn raw materials into semi-finished products or finished products.

  • Examples: construction, factory work

Tertialry production

Activities which provide services.

  • Examples: banking, education, transportation

Relationship between the three types of production

firms and production


Types of division of labour

Simple division of labour

Different workers specialize in producing different goods.

A driver specializes in driving; a baker specializes in baking

Complex division of labour

Different workers specialize I different production stages of the same good or play different roles in teamwork

In one school, teachers specialize in teaching, the principal focuses on management and the accounting clerk concentrates on accounting duties.

Reginal division of labour

Workers in different regions specialize in producing different goods or different production stages of the same good.

In the production of iPhone, the Us specializes in product design, and China specialize in manufacturing.


Advantages and disadvantages of division of labour



1.     Increase labour productivity for the following reasons:

A.        Assign the most suitable person to do the right job

B.        Practice makes perfect

C.        Save time training and moving between tasks

D.        More workers have capital goods to use

E.         Stimulate mechanization

2.     Raise capital productivity

3.     Raise living standards

1.     Work becomes boring  

2.     Loss of job satisfaction

3.     Limited skills of workers

4.     Greater skills of unemployment

5.     Over-interdependence

6.     Excessive standardization of products


Factors restricting the extent of division of labour

Size of market

Market size↓→ Extent of division of labour↓

Nature of product

Production that requires individual creativity → extent of division of labour↓

Factors of production



Factor income/return


Human effort provided by an entrepreneur in making production decisions and bearing risks



Human effort provided by a worker during production including worker’s physical and mental effort



Man-made resources used to help production



Natural resources that can be used in production


A gift of nature



Different features of capital and land





1.     Man-made resources

2.     Human effort is involved

3.     Capital formation/investment involves giving up present consumption for more future consumption

4.     The amount can be increased to raise the productivity of other factors or to replace them  


1.     Natural resources

2.     No human effort is involved

3.     Its creation involves zero cost

4.     Its supply cannot be increased artificially


Labour supply

= Total number of working hours

= Number of workers x Average working hours of workers

Factors affecting labour supply

  • Population size↑
  • Working condition↑
  • Minimum working age ↓
  • Retirement age↑
  • Years of schooling or training↓
  • Attractions for immigration ↑ or restrictions↓

→Number of workers↑

→Labour supply↑

  • Number of public holidays↓
  • Number of days of annual leave and sick leave↓
  • Maximum working hours ↑

→Average working hours↑

→Labour supply↑


Labour productivity

=𝑇𝑜𝑡𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡 / 𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑤𝑜𝑟𝑘𝑖𝑛𝑔 ℎ𝑜𝑢𝑟𝑠

=𝑇𝑜𝑡𝑎𝑙 𝑜𝑢𝑡𝑝𝑢𝑡 / 𝐿𝑎𝑏𝑜𝑢𝑟 𝑠𝑢𝑝𝑝𝑙𝑦

Factors affecting labour productivity



Health of workers

Better health → Labour productivity↑

Education and training

More/better education and training → Labour productivity↑

Incentive to work

Higher incentive to work → Labour productivity↑

Capital and technology

Better use of capital and technology → Labour productivity↑


Better management → Labour productivity↑

Working environment

More decent working environment → Labour productivity↑


Mobility of labour


Occupational mobility of labour

Geographical mobility of labour


The willingness and ease of labour to change from one occupation to another

The willingness and ease of labour to move from one working area to another


The willingness and wish of a cook to change his job to become a teacher

The willingness and wish of a teacher to shift from a school in

Kowloon to a school in New



Factors affecting occupational mobility



Remuneration and working conditions

Better remuneration and working conditions → occupational mobility ↑

Entrance requirements

Relaxing entrance requirements → occupational mobility ↑

Retraining programmes

More retraining programmes → occupational mobility ↑

Market information

More transparent market information → occupational mobility ↑

Cost of changing job

Higher salary of the current job → have to forgo more income if change job → occupational mobility ↓

Extent of division of labour/specialization

Higher extent of division of labour/specialization → occupational mobility ↓


Factors affecting geographical mobility



Economic, political, and social conditions of different regions

Better economic, political, and social conditions → geographical mobility ↑

Immigration policies

Relaxing immigration policies → geographical mobility ↑

Transport network and transport cost

Better transport network and lower transport cost →geographical mobility↑

Market information

More transparent market information → geographical mobility ↑



Methods of wage payment

Piece rate

Workers are paid according to the amount of their output.




To employers

Raising workers’ incentive to work and labour productivity

Lower cost of monitoring workers’ performance

Higher cost of calculating wage payments

Higher cost of monitoring product quality

To employees

Possible to get higher income

Unstable income

Time rate

Workers are paid based on their working hours.




To employers 

Lower cost of monitoring product quality

Lower cost of calculating wage payments

Lowering workers’ incentive to work and labour productivity

Higher cost of monitoring workers’ performance

To employees

Stable income

Cannot ear more money by working faster


Profit-sharing scheme/commission (usually with a basic salary)

A portion of the firm’s profit (or sales revenue) is distributed to workers as a wage payment.




To employers

Raising workers’ incentive to work and labour productivity

Lower cost of monitoring workers’ performance

Transferring some

business risks to workers

Higher cost of calculating wage payments

More difficult to recruit workers

To employees

Possible to get higher income

Unstable income


 A gift of money paid by customers to reward workers.




To employers

²  Raising workers’ incentive to work  

²  Lower cost of monitoring workers’ performance

²  Higher cost of calculating wage payments

²  More difficult to recruit workers

To employees

² Possible to get higher income

² Unstable income


Comparison between different wage payments


Piece rate

Time rate

Profit-sharing scheme/commission


To employers:





Workers’ work incentive and productivity





Cost of calculating wage payments





Cost of monitoring workers’ performance  





Cost of monitoring product quality





Ease of recruiting workers





Transferring business risk from employers to workers



Part of the business risks can be

transferred to workers


To workers:





Possibility of earning a higher income  





Income stability






Conditions where a specific type of wage payment is preferred

Piece rate

  • It is commonly used in manufacturing industries where:
  • workers’ contribution can be easily measured.
  • product quality can be easily monitored.

Time rate

  • t is commonly used in service industries where:
  • workers’ contribution is too costly to measure.
  • high quality of work/product is required.

Profit-sharing scheme

  • For supervisors and managers whose performance is decisive to the firm’s profit and monitor.


  • For workers who provide direct services to customers.


Capital stock

Change in capital stock

= Capital formation – Capital depreciation

Capital formation (investment)

 It is the purchase or production of capital. Investment implies that present consumption is forgone for more future consumption.

Capital deprecation

It is the consumption or disposal of capital.

*The net increase in capital stock is called capital accumulation.


Production cost


Production costs


Variable costs

Fixed costs


Costs which change with output

Costs which do not change with output

Production runs/production periods


Short run

Long run


Production involving both variable and fixed factors.

Production involving only variable factors.

Related concepts

The law of diminishing marginal returns:


When more units of a variable factor are continuously added to a given quantity of fixed factors, the marginal product of the variable factor will eventually decrease, other factors being constant (including technology).


²  MP can decrease

after an initial increase.

²  MP can decrease


Economies of scale:


Production scale↑ → Output↑ → Long run average cost↓


Diseconomies of scale:


Production scale↑ → Output↑ → Long run average cost↑


Optimal scale:


The production scale where the long run average cost is the lowest.


Output calculation in the short run

Average product

= The amount of output produced by a unit of a variable factor on average.

=𝑇𝑃  / 𝑈𝑛𝑖𝑡𝑠 𝑜𝑓 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑓𝑎𝑐𝑡𝑜𝑟

Total product

= The amount of output produced by a given quantity of a variable factor.

= AP x Units of variable factor

= ∑MP

Marginal product

= The change in total amount of output caused by an additional unit of a variable factor

= TPn – TP(n – 1)


Cost calculation in the long run

Average cost

= The cost of producing a unit of output on average.

=𝑇𝐶 / 𝑈𝑛𝑖𝑡𝑠 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡

Total cost

= The cost producing a given quantity of output.

= AC x Units of output

Marginal cost

= The change in total cost of producing an additional unit of output.

= TCn – TC(n -1)


Internal economies of scale

When the production scale of a firm expands, the long run average cost decreases.


Technical economies

Large firm can more fully utilize its machines and afford more advanced machines → LRAC ↓

Managerial economies

Large firm can apply a wider scope of specialization among its managers and attract better managers →

LRAC ↓   

Financial economies

Large firm may borrow money from banks in a lower interest rate and is easier to issue shares to avoid paying interest → LRAC ↓   

Purchasing economies

Large firm can buy in bulk and obtain a larger discount

→ LRAC ↓   

Marketing economies

Larger firm can spread its advertising costs over a large

output → LRAC ↓   

Risk diversification economies

Large firm can diversify its input sources, products, and markets to spread its risks → LRAC ↓   

Research and      development economies

Large firm can spread its costs on R&D over a larger output → LRAC ↓   


Internal diseconomies of scale

When the production scale of a firm expands beyond the optimal scale, the long run average cost is raised.


Managerial diseconomies

When a firm keeps expanding, its organization may become too complicated. Decision may thus be delayed, and coordination may be weakened, lowering the managerial efficiency → LRAC ↑   

Financial diseconomies

If a firm enlarges its scale by borrowing continuously, it may need to pay a higher interest rate to obtain capital since it is too risky for a bank to lend too much money to the same firm → LRAC ↑

Purchasing diseconomies

A continuously expanding firm may have to purchase more expensive resources or use more expensive substitutes → LRAC ↑

Marketing diseconomies

If a firm keeps expanding, existing markets may approach saturation. The firm thus need to pay a higher marketing cost develop new markets or promote new products → LRAC ↑


External economies of scale

When an industry becomes larger, the long run average cost decreases.


Lower cost of recruiting and training workers

More workers would be attracted to the industry, employed, and trained. Thus, more experienced, and qualified workers will be available in the industry, lowering firm’s costs of recruiting and training

workers → LRAC ↓

Lower cost of marketing and promotion

More people will know about the industry’s products, lowing the firm’s costs of marketing and promotion→


Lower cost of buying backup services

More related businesses will be developed, lowering the firm’s costs of buying back-up services → LRAC

Lower transportation cost

Due to concentration of shops, goods can be delivered to shops more easily → LRAC ↓

Sharing of technology and production facilities

Production facilities, resources, technology and inventories can be shared among firms → LRAC ↓


External diseconomies of scale

When an industry becomes larger, the long run average cost increases.


Increase in input prices

Excessive expansion of firms creates a huge demand for inputs, rising input prices, increasing the production cost

→ LRAC ↑

Saturation of existing market

Firms may need to develop new markets or promote new products, increasing the marketing costs → LRAC

Increase in the cost of using back-up services

Higher demand for back-up services would increase the cost of these

services → LRAC ↑

Heavy traffic and congestion

Concentration of firms may lead to heavy traffic flow and congestion, increasing the transportation cost→



Expansion of firms

Internal expansion

It is the expansion of a firm on its own, e.g., setting up a new branch on its own.

External expansion/integration

It is the expansion of a firm by combining with another firm, e.g., by taking over another firm.

The four types of expansion


Horizontal expansion

Vertical expansion

Lateral expansion

Conglomerate expansion


backward expansion

Vertical forward expansion


At the same


stage of the same product

At different production stages of the same product

Of related but not

competing products

Of unrelated products

At a preceding stage

At a later stage


(Textbook factory)

Another textbook factory

Paper making factory


Magazine factory

Coffee shop


Motives for the four types of expansion

Horizontal expansion

Vertical expansion

Lateral expansion

Conglomerate expansion

Enjoy economies of scale

More efficient use of resources

Increase market share



competition (for external expansion only)

Make use of its brand name to sell other products


Secure the supply of inputs


 Forward: Secure market outlets for outputs

Spread risk through products diversification


Market structure

Features of different market structures


Perfect competition

Imperfect competition  

Monopolistic competition



Number of


Many small sellers


A few dominant sellers with or without many small sellers

Only one seller

Ease of entre

Free entry


Not easy  

No entry

Nature of products



Can be homogeneous or heterogeneous

No close substitutes

Availability of market information to buyers & sellers

Perfect information

Imperfect information

Other features

Price takers (only one price in the market)

Does not

engage in non-price competition

Price searcher (more than one price in the market)

Engage in

both price and non-price competition


in pricing policies

Prices tend to

be rigid but sometimes a price war may occur


leadership may exist


competition is


Engage in

both price and nonprice competition


Sources of monopoly power

  • Sole ownership of essential resources or techniques required in production
  • Sole ownership of patents or copyrights
  • Sole ownership of franchise
  • Government monopoly
  • Natural monopoly: A market allows no room for more than one firm to exist as the set-up cost is extremely high, only the largest/the first firm in the market can enjoy the lowest average cost, thus driving competitors out of the market and becoming a natural monopoly.
  • Integration or collusion


Major objectives of private enterprises

  • Profit maximization
  • Market share maximization
  • Corporate social responsibility
  • Provision of non-profitmaking goods and services

Calculation related to profit-maximizing

Profit-maximizing output

It is the output at which a firm can maximize its profit

Marginal revenue (MR)

= TRn – TR(n-1)

Marginal cost (MC)

= TCn – TC(n-1)

Profit maximizing condition

P(MR) = MC


Calculation of profit

Profit = Total revenue – Total cost

     = (P x Q) – (TVC + TFC)

     = (P x Q) – (AVC x Q + TFC)

     = (P x Q) – (∑MC + TFC)

     = PS -TFC

     = (TR – TVC) – TFC

*P = Price, Q = units of output, TVC = Total variable cost, TFC = Total fixed cost,  

AVC = Average variable cost, MC = Marginal cost, PS = Producer surplus,         TR = Total revenue


Change in profit under different conditions

  • When P↑ → Profit↑
  • When TFC↑ → Profit↓
  • When MC↑ → Profit↓

*A price-taking firm’s marginal cost schedule is its supply curve.


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