2.6 Production Flashcards
What is Total Cost
Total Cost = Total Variable + Total Fixed Costs
What is Average Cost
Average Cost = Total Cost / Quantity
What is Total Revenue
Price x Quantity
What is average revenue equal to?
price
What is short run
- a period of time where at least one factor of production is fixed
What is long run?
- A period of time where all factors of production can vary and scale of production can vary
What is an economy of scale
- Where average cost decreases as output increases, only in the long run
- Internal Economies of Scale are due to a firms growth
- External Econonies of Scale are due to factors outside the firm’s control
Importance of Profit/Loss
- signals where scarce resources should be allocated
- Profit can be reinvested in the business
- Profit acts as a signal for other producers to enter the market
- Loss is vice versa
What is the importance of revenue
- Inspires more confidence into the business
Why do Diseconomies of Scale occur:
- Lack of control (as workforce size increases keeping them productive is harder)
- Lack of Co-Ordination (as workforce size increases managing them is harder)
- Lack of Motivation ( as workforce increases workers may feel more alienated and unnmotivated)
Technical Economies of Scale:
- Can spread the cost of specialist equipment more if they produce more
Increased Dimension Economies of Scale:
- Doubling the size of a tanker or plane leads to 8x volume
Purchasing Economies of Scale:
- Bulk buying materials in higher quantities means lower cost per unit
Division of Labour Economies of Scale:
- Workers can specialise and be extremely efficient lowering average cost
R&D Economies of Scale:
- Larger firms can spend more on R&D making sure they always stay ahead of their competition by innovating new products
Financial Economies of Scale:
- Larger firms are perceived to be more stable so banks and financial institutions would rather lend to them at a lower rate of interest
Risk Bearing Economies of Scale:
- Larger firms can speak risk over many products so if one does badly the others can cover them up
Marketing Economies of Scale:
- Firms can spread marketing costs over lots of products and reach consumers in many ways
Managerial Economies of Scale:
- Larger firms can hire specialist staff to do different tasks
What is Productivity
Productivity = Total Output / Total Input
How can you increase productivity
- specialisation as workers will be focused on one task only
- Substituting Capital for Labour as capital is generally more efficient
- More Training - Workers will be more efficient
- Better Raw Materials
Importance of Productivity for Households
- Increase in wages and standard of living as a reward for higher productivty
Importance of Productivity for Firms
- Lower average cost so more competition
- Higher Profit margin
Importance of Productivity for Governments
- Firms and consumers make more so increased tax revenue
- Increased competitiveness so increased exports so increase in economic growth
Evaluation Points for Productivity
- If firms replace labour with capital, this may increase unemployment while increasing productvity
- If unemployment increases, governments receive less tax revenue and spend more on benefits
- Increases in production may mean more employment, unless the increase in. production is driven by productivity
- Firms who cannot increase productivity may find themselves unable to compete and lower prices and thus go out of business
- Firms may spend more on training and capital than brought back by gains of increased productivity
- Other countries may put trade restrictions on our exports to protect against lower prices of exports caused by increased productivity
- Consumers may end up with lower quality standrdised goods
