2.6 Production

Question 1

What is Total Cost

Answer 1

Total Cost = Total Variable + Total Fixed Costs

Question 2

What is Average Cost

Answer 2

Average Cost = Total Cost / Quantity

Question 3

What is Total Revenue

Answer 3

Price x Quantity

Question 4

What is average revenue equal to?

Answer 4

price

Question 5

What is short run

Answer 5

• a period of time where at least one factor of production is fixed

Question 6

What is long run?

Answer 6

• A period of time where all factors of production can vary and scale of production can vary

Question 7

What is an economy of scale

Answer 7

• 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

Question 8

Importance of Profit/Loss

Answer 8

• 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

Question 9

What is the importance of revenue

Answer 9

• Inspires more confidence into the business

Question 10

Why do Diseconomies of Scale occur:

Answer 10

• 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)

Question 11

Technical Economies of Scale:

Answer 11

• Can spread the cost of specialist equipment more if they produce more

Question 12

Increased Dimension Economies of Scale:

Answer 12

• Doubling the size of a tanker or plane leads to 8x volume

Question 13

Purchasing Economies of Scale:

Answer 13

• Bulk buying materials in higher quantities means lower cost per unit

Question 14

Division of Labour Economies of Scale:

Answer 14

• Workers can specialise and be extremely efficient lowering average cost

Question 15

R&D Economies of Scale:

Answer 15

• Larger firms can spend more on R&D making sure they always stay ahead of their competition by innovating new products

Question 16

Financial Economies of Scale:

Answer 16

• Larger firms are perceived to be more stable so banks and financial institutions would rather lend to them at a lower rate of interest

Question 17

Risk Bearing Economies of Scale:

Answer 17

• Larger firms can speak risk over many products so if one does badly the others can cover them up

Question 18

Marketing Economies of Scale:

Answer 18

• Firms can spread marketing costs over lots of products and reach consumers in many ways

Question 19

Managerial Economies of Scale:

Answer 19

• Larger firms can hire specialist staff to do different tasks

Question 20

What is Productivity

Answer 20

Productivity = Total Output / Total Input

Question 21

How can you increase productivity

Answer 21

• 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

Question 22

Importance of Productivity for Households

Answer 22

• Increase in wages and standard of living as a reward for higher productivty

Question 23

Importance of Productivity for Firms

Answer 23

• Lower average cost so more competition
• Higher Profit margin

Question 24

Importance of Productivity for Governments

Answer 24

• Firms and consumers make more so increased tax revenue
• Increased competitiveness so increased exports so increase in economic growth

Question 25

Evaluation Points for Productivity

Answer 25

• 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