DSE ECON|廠商與生產 Firms and Production

Public Enterprises

Government Department

Examples

  • Fire Service Department
  • Hong Kong Post

Public corporation

Examples

  • Hong Kong Airport Authority
  • Ocean Park

Advantages and disadvantages of public enterprises and private enterprises

Advantages of public enterprises over private enterprises

Government will have a better control of the price so that it may reduce the price to relieve the burden of users and the general public
→ as public enterprises are less profit maximization than private enterprises

Easier to get information about the general public from the government for decision-making

The company will be more easier to get loans as it is fully owned and supported by the government

Disadvantages of public enterprises over private enterprises

It may make the management less efficient
→ the cost of operating the business may be higher

Public enterprises may be less sensitive to price signal
→ the revenues of the same business operated by public enterprises may be lower when compared with that of private enterprises

Private Ownership

Sole proprietorship

Partnership

Private limited company

Public limited company

Number of owners

1

2 - Unlimited

1 - 50

1 - Unlimited

Set-up procedures

Simple

Simple

Complicated

Complicated

Legal entity

No independent legal status

No independent legal status

Independent legal status

Independent legal status

Liability

Unlimited

Unlimited

Limited

Limited

Business continuity

Lack of continuity

Lack of continuity

Lasting continuity

Lasting continuity

Ownership and management

Not separated

Not separated

Separated

Separated

Transfer of ownership / shares

Easy
(Freely transferrable)

The consent of all partners is required
Ownership is not freely transferable

The consent of other shareholders is required
Shares are not freely transferable

Does not need the consent of other shareholders
Shares are freely transferable

Profit tax rate

Lower

Lower

Higher

Higher

Source of capital

Narrowest

Narrower

Wider

Widest

Source of capital
(Shares and Bonds)

Cannot issue shares and bonds

Cannot issue shares and bonds

Can issue shares and bonds (but cannot issue them to the public)

Can issue shares and bonds to the public

Disclosing accounting information to the public

No

No

No

Yes

Limited and unlimited liability

Limited liability

The liability of an owner of the firm is confined to the amount of his/her investment in the firm

Unlimited liability

The liability of an owner of the firm is NOT confined to the amount of his/her investment in the firm

Difference between Private limited company and Public limited company

Private Limited Company

Public Limited Company /
Listed Company

Shares are freely transferrable?

No

Transfer of shares requires the consent of other shareholders

Yes

Transfer of shares does NOT require the consent of other shareholders

Disclosing accounting information to the public?

No

Yes

Issuing shares to the general public?

No

Yes

Advantages / disadvantages of private limited company and public limited company

Advantages of private limited company over public limited company

Do not need to disclose accounting information to the public

Disadvantages of private limited company over public limited company

Cannot issue shares to the public to raise capital
narrower source of capital

Shares and Bonds

Advantages of shares and bonds to buyers (small investors)

Bonds over shares

Advantages

Stable return
Small investors can get interest return even if the company does not make any profit that year as the company has the obligation to pay interests to bondholders

Higher priority of getting paid than shareholders if the company is liquidated
reduce the loss on investment

Disadvantages

Bondholders do not have voting rights in the shareholders’ meeting
cannot influence company’s decisions

Cannot get more return
Since interests for bonds is fixed, even if the company earns more profit, bondholders cannot get more interests

Shares over bonds

Advantages

Shareholders have voting rights in shareholders’ meeting
can influence company’s decisions

The possibility of getting higher dividend return
Since dividend return for shares is not fixed, if the company earns more profit, shareholders may be able to get more dividends

Disadvantages

Dividend returns are more unstable
the company does not have any obligation to give out dividends
→ even if there is profit, there can be no dividends

Lower priority of getting paid than bondholders if the company is liquidated
higher chance of the loss of investment than that of bondholders

Advantages of shares and bonds to company (owners)

Bonds over shares

Advantages

Risks of being taken over will not be affected
(Meanwhile, issuing shares will increase the risk of being taken over)

Will not dilute the control right over the firm
When more bonds are issued, the control rights of existing shareholders will not be reduced

Disadvantages

Have the obligation to pay interests even if the company suffers from loss
(Meanwhile, the company does not have obligation to pay dividends)

Since bonds have maturity dates
→ the company has the obligation to redeem the bonds
(Meanwhile, the company does not have obligation to redeem shares as shares do not have maturity dates)

Shares over bonds

Advantages

No obligation to pay dividend
Even if the company earns profit, it can still not distribute dividends to shareholders
(Meanwhile, the company has the obligation to pay interests for bonds)

No redemption obligations on shares
Since shares
do not have maturity dates, the company does not need to redeem the shares
(Meanwhile, since bonds
have maturity dates, the company have the obligation to redeem bonds)

Disadvantages

Higher risk of being taken over
(Meanwhile, issuing bonds will not affect the risk of being taken over)

The controlling power (voting power) of existing shareholders reduces
dilute the control right of existing shareholders over the firm

Types of Production

Primary Production

Extracting raw materials from natural resources

Secondary Production

Changing raw materials into semi-finished products / finished products

Tertiary Production

Providing services

Division of Labour

How division of labour can enhance labour productivity?

  • Choose the most suitable person for the job
  • Practice makes perfect
  • Save times in training workers
  • Save worker’s time in shifting between different jobs
  • Stimulus Mechanization

Factors of Production

Labour

Functions

Provide human effort for production

Returns (Factor income)

Wage

Entrepreneurship

Functions

Bear business risks and make business decisions

Returns (Factor income)

Profit

Capital

Functions

Man-made resources used for production

Returns (Factor income)

Interest

Land

Functions

Natural resource which is a gift of nature

Returns (Factor income)

Rent

Labour Productivity

– 迴享 Recurso

The unit of labour productivity is output / man-hour

Factors affecting Labour Productivity ↑

  • Better health conditions of labour
  • More training
  • Higher education level
  • More mechanization / improvement in technology
  • Wage payment methods
    (e.g. Piece rates has higher working incentive)
  • Better working environment
  • Better Management / production method e.g. practicing division of labour

Labour Mobility

Occupational mobility

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

Geographical mobility

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


How does a policy affect labour mobility? (3 marks)

Point out which type of mobility is affected ( Occupational or Geographical ? )

(1)

Change in mobility e.g. increase / decrease / remain unchanged

(1)

Possible explanations:

  • the cost of … Increase / decrease / remain unchanged
  • easier / more willing / more difficult / less willing …

(1)

Wage Payment Methods

Wage payment methods (Employers)

Piece rate

Time rate

Profit-sharing scheme

Tips

Working incentives / productivity of labour

Higher

Lower

Higher

Higher

Cost of monitoring the quality of output / services

Higher

Lower

Lower

Lower

Spreading the business risks to employees

N / A

N / A

Possible

N / A

Cost of monitoring the performance of labour

Lower

Higher

Lower

Lower

Difficulties on maintaining a team of staff

Difficult

Easy

Difficult

Difficult

Wage payment methods (Employees)

Piece rate

Time rate

Profit-sharing scheme

Tips

Possibility of getting higher income

Yes

No

Yes

No

Income stability

Unstable

Stable

Unstable

Unstable


Jobs / occupations that suitable to the method of calculating wages

Time rate

Feature

Workers are paid according to their working hours

Suitable to jobs which

  • Costly / very difficult to measure the output of workers
  • No standardized work
  • High quality of work is required

Piece rate

Feature

Workers are paid according to their amount of output produced

Suitable to jobs which

  • Workers’ contributions can be measured easily
  • Product quality can be monitored easily

Profit-sharing / Commission

Feature

A proportion of profit is distributed to workers as wages

Suitable to jobs which

  • Workers’ performance is decisive to the profits of firms

Tips

Feature

Money paid by customers to reward workers providing services to them

Suitable to jobs which

  • Workers’ performance is decisive to the profits of firms

Advantages / disadvantages of different wages payment method to workers / employees

Time rate

More stable income

It is not possible for workers to get higher income with more efforts

Piece rate

It is possible for workers to get higher income with more efforts

Unstable income

Profit-sharing / Commission

It is possible for workers to get higher income with more efforts

Need to bear a part of business risks / Unstable income

Tips

It is possible for workers to get higher income with better service

Need to bear a part of business risks / Unstable income

Advantages / disadvantages of different wages payment method to employers

Time rate

Easier to maintain a team of staff

Lower cost of measuring the contribution / outputs of workers

Lower working incentive / Lower productivity

Higher cost of monitoring the performance of labour

Piece rate

Higher working incentive

Lower cost of monitoring the performance of labour

Workers may forego quality for quantity / lower quality of products / higher cost of monitoring the quality of products

More costly to calculate wage payments / Higher cost in measuring the output

More difficult to maintain a team of staff

Profit-sharing / Commission

Higher working incentive

Can spread the business risks to employees

Lower cost of monitoring the performance of labour

More difficult to maintain a team of staff

Tips

Higher working incentive

Lower cost of monitoring the performance of labour

More difficult to maintain a team of staff

Production in the short run and in the long run

Fixed factors and Variable factors

Fixed factor

  • Only exists in the short run
  • When output increases,
    The quantity of fixed factors remains unchanged
  • Fixed cost is the cost of employing fixed factor.
    Fixed cost remains unchanged when output increases

Variable factor

  • Exists in both the short run and the long run
  • When output increases,
    The quantity of variable factors remains increases
  • Variable cost is the cost of employing variable factor.
    Variable cost increases when output increases

Law of diminishing marginal returns