DSE ECON｜廠商與生產 Firms and Production

Business ownership

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

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