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AQA A-Level Economics > 1.4 Production, costs, and revenue > Flashcards

1.4 Production, costs, and revenue Flashcards

1
Q

Production

A

converting inputs into outputs of goods and services

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2
Q

Factors of production (4)

A

Inputs into the productive process; land, labour, capital enterprise

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3
Q

Total cost

A

the whole cost of producing a particular level of output

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4
Q

Total Cost Formula

A

fixed costs + variable costs

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5
Q

Fixed costs

A

cost of production which, in the short run, does not change with output

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6
Q

Variable cost

A

cost of production which, in the short run, changes with the amount that is produced

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7
Q

Marginal

A

a prefix used in economics to indicate a point of possible change

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8
Q

Marginal cost (MC)

A

the change in total costs associated with a one-unit change in output

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9
Q

Average

A

a prefix used in economics to indicate a figure has been divided by quantity of output

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10
Q

Average cost (AC)

A

the total cost divided by the quantity produced

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11
Q

Total product

A

the quantity of output measured in physical units produced by a given number of inputs over a period of time

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12
Q

Long run production

A

all factors of production are variable

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13
Q

Short run production

A

at least one factor of production is fixed; more can be produced but the firm will come up against the law of diminishing returns if it tries to do so

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14
Q

Division of labour

A

different workers perform different tasks in the course of producing a good or a service

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15
Q

Assembly line

A

production organised into a series of processes by which a succession of identical goods become progressively assembled

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16
Q

Price competition

A

when a firm reduces prices in order to sell more goods

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17
Q

Productivity

A

output per unit of factor of production

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18
Q

Labour productivity

A

Output per unit of labour

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19
Q

Capital productivity

A

Output per unit of capital

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20
Q

Law of diminishing returns

A

where increasing amounts of a variable factor are added to a fixed factor and the amount added to total product by each unit (ie the marginal and average product) of the variable factor eventually decreases

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21
Q

Advantages of division of labour (4)

A
  • Increases productivity of workers
  • Cheaper unit costs
  • Lower training cost
  • lower costs of production give firm a competitive advantage in price competition
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22
Q

What do changes in marginal product suggest about average cost?

A
  • as marginal product rises, average product is rising and average cost is falling
  • as marginal product falls, average product is falling and average cost is rising
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23
Q

Functions of money (4)

A
  • medium of exchange
  • measure of value
  • store of value
  • standard of deferred payment
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24
Q

Specialisation

A

workers, firms, regions or nations performing a narrow range of tasks or producing a certain range of goods, and trading the surplus with others

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25
Q

Absolute advantage

A

where a country can produce more of a good than other countries with the same amount of resources

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26
Q

Double coincidence of wants

A

two people who want to exchange goods of equal value

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27
Q

Trade

A

the buying and selling of goods and services

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28
Q

Exchange

A

to give something in return for something received. Money is a medium of exchange

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29
Q

money

A

an asset that can be used as a medium of exchange; it is used to buy things

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30
Q

Internal economies of scale

A

long-run average costs falling caused by growth of the firm [due to increasing returns to scale)

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31
Q

Internal diseconomies of scale

A

long-run average costs rising caused by growth of the firm [due to decreasing returns to scale)

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32
Q

External economies of scale

A

long-run average costs falling caused by growth of the industry or market of which the firm is a part

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33
Q

External diseconomies of scale

A

long-run average costs rising caused by growth of the industry or market of which the firm is a part

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34
Q

Productively Efficient Output

A

output with the lowest average cost of production; occurs where MC = AC

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35
Q

Types of internal economies of scale (6)

A
  • risk-bearing
  • financial
  • managerial
  • technological
  • marketing
  • purchasing
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36
Q

Risk-bearing economies of scale

A
  • When a firm becomes larger, they can expand their production range.
  • Therefore, they can spread the cost of uncertainty.
  • If one part is not successful, they have other parts to fall back on.
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37
Q

Financial economies of scale

A

Banks are willing to lend loans more cheaply to larger firms, because they are deemed less risky. Therefore, larger firms can take advantage of cheaper credit.

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38
Q

Managerial economies of scale

A
  • Larger firms are more able to specialise and divide their labour.
  • They can employ specialist managers and supervisors, which lowers average costs.
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39
Q

Technological economies of scale

A

Larger firms can afford to invest in more advanced and productive machinery and capital, which will lower their average costs

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40
Q

Marketing economies of scale

A

Larger firms can divide their marketing budgets across larger outputs, so the average cost of advertising per unit is less than that of a smaller firm

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41
Q

Purchasing economies of scale

A
  • Larger firms can bulk-buy, which means each unit will cost them less. For example, supermarkets have more buying power from farmers than corner shops, so they can negotiate better deals
42
Q

Types of internal diseconomies of scale (3)

A
  • control
  • co-ordination
  • communication
43
Q

Control diseconomies of scale

A

It becomes harder to monitor how productive the workforce is, as the firm becomes larger.

44
Q

Coordination diseconomies of scale

A

It is harder and complicated to coordinate every worker, when there are thousands of employees.

45
Q

Communication diseconomies of scale

A

Workers may start to feel alienated and excluded as the firm grows. This could lead to falls in productivity and increases in average costs, as they lose their motivation.

46
Q

Examples of external economies of scale (6)

A
  • Skilled labour force
  • improved infrastructure
  • Access to suppliers
  • Similar businesses in the area
  • good reputation
  • specialised services and markets
47
Q

Total revenue

A

all the money received by a firm from selling its total output

48
Q

Total revenue =

A

Price x Quantity

49
Q

Average revenue (AR) =

A

total revenue/quantity

50
Q

Marginal revenue (MR) =

A

change in total revenue / change in quantity

51
Q

Revenue maximisation occurs at

A

MR=0

52
Q

Describe the relationship between the MR curve and the AR curve

A

The MR curve falls twice as quickly as the AR curve

53
Q

Profit-maximising level of output occurs at

A

MR = MC

54
Q

Sales maximisation occurs at

A

AC = AR

55
Q

Profit

A

the difference between total revenue and total cost

56
Q

Total profit =

A

total revenue - total cost

57
Q

Normal profit

A

the minimum profit required to keep factors of production in their current use in the long run, however insufficient to attract new firms to the market

58
Q

Abnormal/supernormal profit

A

The profit over an above normal profit

59
Q

Subnormal profit

A

profit below normal profit

60
Q

Shutdown point

A

the minimum point on a firm’s average variable cost curve; if the price falls below this point, the firm shuts down production in the short run

61
Q

Chain of production

A

the route that a good takes (through primary, secondary, and tertiary sectors) from being a raw material to being a good

62
Q

Value added

A

the amount by which the value of goods is increased at each stage of production

63
Q

Value added tax (VAT)

A

an expenditure tax on goods charges at each stage of production as a percentage of the value added at that stage

64
Q

Marginal returns of labour

A

the change in the quantity of total output resulting from the employment of one more worker, holding all the other factors of production fixed

65
Q

Average returns of labour

A

total output divided by the total number of workers employed

66
Q

Total returns of labour

A

total output produced by all workers employed by a firm

67
Q

Plant

A

an establishment, such as a factory, a workshop, or a retail outlet, which is owned and operated by a firm

68
Q

Long-run

A

the time period in which no factors of production are fixed and in which all the factors of production can be varied

69
Q

Returns to scale

A

the rate by which out put changes if the scale of all the factors of production is changed

70
Q

Increasing returns to scale

A

increasing the scale of all factors of production causes a more than proportionate increase in output

71
Q

Constant returns to scale

A

increasing the scale of all factors causes a proportionate increase in output

72
Q

Decreasing returns to scale

A

increasing the scale of all factors of production causes a less than proportionate increase in output

73
Q

Minimum efficient scale (MES)

A

the lowest output at which the firm is able to produce at the minimum achievable LRAC

74
Q

Market structure

A

the characteristics of a market which determine the behaviour of firms within the market (e.g. no. of sellers, no. of buyers, ease of entry for new firms)

75
Q

Barriers to entry

A

makes is difficult or impossible for new firms to enter the market

76
Q

Natural monopoly

A

where there is only room in a market for one firm benefitting from economies of scale to the full

77
Q

Examples of natural monopolies

A

railways, water network, electricity grid, broadband network

78
Q

why are these examples of natural monopolies?

A
  • all have high infrastructural costs
  • a market structure with one firm would therefore have lower LRAC than a structure with more than one
79
Q

Describe the LRAC curve of a natural monopoly

A
  • falls continuously over a large range of output
  • result may be that there is only room in a market for one firm to fully exploit the economies of scale that are available and therefore achieve productive efficiency
80
Q

Describe the LRAC curve for perfect competition

A
  • horizontal line
  • firms neither benefit from economies of scale nor suffer diseconomies of scale
  • no firm is at a cost advantage or disadvantage to other firms
81
Q

Describe the LRAC curve for monopolistic competition

A
  • diseconomies of scale at low levels of output
  • MES is small share of total market demand
  • many small firms in market
82
Q

Describe the LRAC curve for oligopoly

A
  • economies of large scale production
  • diseconomies of scale eventually set in but only after substantial economies have been achieved
  • MES at high level of output
  • room for more than one firm as diseconomies do eventually come into effect
83
Q

invention

A

making something entirely new; something that did not exist before

84
Q

Innovation

A

improves on or makes significant contribution to something that has already been invented, thereby turning the results of invention into a product

85
Q

Capital intensive production

A

production that makes more use of capital relative to labour

86
Q

Labour intensive production

A

production that makes more use of labour relative to capital

87
Q

Mechanisation

A

process of moving from a labour-intensive to a more capital-intensive method of production, employing more machines and fewer workers

88
Q

Automation

A

the use of capital equipment with automatic control where machines operate other machines and so are capable of completely replacing labour in the production process

89
Q

moving assembly line

A

an assembly line where completed and semi-completed goods are mechanically moved between the assembly processes, forcing labour to work at the speed that the goods are moving

90
Q

dynamic efficency

A

occurs in the long run, leading to the development of new products and more efficient processes that improve productive efficiency

91
Q

Creative destruction

A

a process where firms produce or create innovative new products that replace or destroy existing products in the market

92
Q

the law of one price

A

in the absence or trade frictions (such as transport costs and tariffs) and under conditions of free competition and price flexibility (where no individual sellers or buyers have the power to manipulate prices and prices can freely adjust), identical goods sold in different locations must sell for the same price when prices are expressed in common currency

93
Q

Why might improvements in technology cause demand for labour to increase?

A
  • makes labour more productive (output per worker increases) so demand increases
  • demand for a certain type of labour may decrease, causing demand for another type to increase
94
Q

Why might improvements in technology cause demand for labour to decrease?

A
  • increases capital productivity and may cause firms to want to adopt automated production processes, causing demand for labour to fall
  • demand for a certain type of labour may increase, causing the demand for another to decrease
95
Q

How does an improvement in dynamic efficiency affect the LRAC curve?

A

downward shift

96
Q

How has the invention of e-commerce affected firms? (4)

A
  • firms can now exist without physical premises
  • reduced barriers to entry as it is easier to enter the market without having to set up a physical outlet/branch
  • number of firms increase
  • larger range of products for consumers to choose from, with the ability to compare prices easily
97
Q

primary sector

A

extractive and agricultural industries (e.g. farming, logging, hunting, fishing, and mining)

98
Q

Secondary sector

A

industries involved in producing consumer goods and capital goods

99
Q

Tertiary sector

A

industries involved in the production of services (e.g. retailing)

100
Q

uncertainty

A

the degree to which information is imperfect or unknown

101
Q

waste

A

the consumption of resources without value being added

102
Q

scientific management

A

the use of scientific methods to determine the more efficient production processes in order to increase productivity

AQA A-Level Economics (14 decks)

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