2.6 Production

Question 1

What is profit

Answer 1

The amount of money a producer has left after all the costs have been paid.
i.e. When the revenue is greater than the total costs

Question 2

What is the role of a producer

Answer 2

To make and supply goods and services

Question 3

Why are producers important in the economic system

Answer 3

They both employ workers and pay workers wages

Question 4

How can individuals act as producers

Answer 4

They can employ themselves and supply services such as child minding, cooking and cleaning

Question 5

How can firms act as producers

Answer 5

They supply goods and servicers,

Question 6

How does the government act as a producer
Think about what goods only they offer
What goods they offer and are private
What goods they used to offer but are now private

Answer 6

They offer a range of services that the private sector does not offer like sewage, streetlights and police.
They also supply some things that the private sector does supply like healthcare.
In the past, the government also owned indeustries like coal, steel and postal services, before they were all privatised

Question 7

What is productivity

Answer 7

A measure of the degree of efficiency in the use of factors of production in the production process. It is measured in terms of output per unit of input.

Question 8

What is an increase in production likely to lead to (5)

Answer 8

1. Increase in employment (unless there is also increase in productivity)
2. Increase in profits for the firm and the industry
3. Larger economies of scale
4. Economic growth
5. Rise in standard of living as consumers have more goods and services to buy

Question 9

How do you calculate productivity

Answer 9

Total output/ Total input

Question 10

What can productivity depend on
(3)

Answer 10

Improving the inputs to the production process
This can be done by:
1. Increasing standard of education or training
2. Find better quality raw materials
3. Small changes to worker’s work can often have a big impact e.g. increasing length of breaks

Question 11

Why is high productivity important
2 for firms
2 for governments

Answer 11

Firms
- Lower average costs and increasing economies of scale.
Greater profits allowing firms to pay higher wages to the best workers which will incentivise them to work harder to increase productivity.
Governments
- Productivity eill increase the total output of the economy, which will lead to greater employment and higher wages
- More competitive firms eill lead to greater exports and therefore further economic growth

Question 12

What are the costs of productivity (2)

Answer 12

• If a firm increases productivity with replacing workers with efficient technology (capital), it will increase unemployment. Gov will have to support them which leads to opportunity cost and long term effets on workers family
• Increased productivity may lead to greater international competitiveness which may lead to other countries retaliating

Question 13

How can producers increase productivity (3)

Answer 13

1. Better education/ Training
2. Better technology
3. Workers specialising

Question 14

What is total cost

Answer 14

All the costs of the firm added together

Question 15

What is total revenue

Answer 15

The total income of a firm from the sale of all of their goods and services

Question 16

What is average costs

Answer 16

The cost of producing a unit (unit cost of production)

Question 17

How do you calculate total cost

Answer 17

Total cost = Total fixed costs + Total variable costs

Question 18

How do you calculate average costs

Answer 18

Total cost / Quantity

Question 19

How do you calculate total revenue

Answer 19

Price X Quantity

Question 20

What is average revenue

Answer 20

The revenue per unit sold, also known as average price

Question 21

What is a loss

Answer 21

When a firm’s total revenue is less than its total costs

Question 22

What is profit maximisation

Answer 22

When there is the greatest difference between total revenue and total cost (in a positive way)
It is a main aim for firms

Question 23

What is the importance of cost for producers

Answer 23

If the total costs are larger than the total revenue, then the firm is making a loss and they wont be able to pay their workers’ wages

All firms keep costs as low as possible so that they can increase their profits

Question 24

What is the importance of revenue for producers (4)

Answer 24

1. It is a constant inflow of money and this means in the long run producers are able to make a profit and stay open.
2. Growth in revenue encourages investors to invest in the firm- can lead to expansion
3. Steady levels of revenue allow producers to secure loans with favourable interest rates. This means producers don’t have to worry about short term about payment of workers
4. It creates confidence in the firm and therefore workers are going to be more happy working there.

Question 25

What is the importance of profit for producers (3)

Answer 25

1. Profit is an indication of a more efficient use of resources and therefore indicates the success of investment of a firm.
2. It signals to scarece resources to move to firms making the most profit.
3. It is also a means to grow the business by investing

Question 26

What is the importance of profits in a market economy

Answer 26

• Generates finance for investments
• Acts as a signal to show other producers there is profit to be made in that market
• Allows producers to attract more resources to the firm or industry

Question 27

What is the importance of a loss for producers
Short term
long term
industry

Answer 27

• In the short term, a loss is not too bad, as the busoness can still survive if it has money saved.
• In the long run, the firm cannot keep making a loss, and it will either run out of money, or the investors will demand a refund
• If an industry is making a loss, the factors of production will leave to find an industry that is making a profit.

Question 28

What are economies of scale

Answer 28

The cost advantages a firm can gain by increasing the scale of production, leading to a fall in average costs

Question 29

What are internal economies of scale

Answer 29

Economies of scale that lead to growth of the firm itself, leading to cost saving and fall in average costs

Question 30

Explain technical economies

Answer 30

Large firms can purchase specialist equipment which allows them to lower production costs.
Smaller firms cant do this because it costs too much

Question 31

Explain economies of increased dimensions

Answer 31

Doubling size of a shipping container 4Xs the price, but 8Xs the volume you can export. This effectively means shipping costs halve and costs of production decreases

Question 32

Explain purchasing or bulk buying economies

Answer 32

Buying goods in bulk leads to a lower cost per unit. So the cost of materials fall

Question 33

Explain division of labour

Answer 33

Different workers can be specialised to complete different tasks in a production process, so verall production time is faster

Question 34

Explain financial economies

Answer 34

• Larger firms can borrow more money from banks more easily
• with lower interest rates so they have more money to invest in new capital
• leading to more efficient production and lower production costs

Question 35

Explain Managerial economies

Answer 35

Larger firms can afford to employ specialist staff, like marketing or finance, which will increase productivity and lower costs

Question 36

Explain marketing economies

Answer 36

Larger firms can use more expensive advertising campaignsthat reach more potential customers
This means the average cost of marketing per unit falling

Question 37

Explain risk bearing economies

Answer 37

Larger firms are able to spread risk by offering a large variety of products
This means if one product doesnt sell it can easily sell others
This can also happen if the same goods are sold in different markets

Question 38

Explain Research and development economies
With stat on BP R&D

Answer 38

Larger firms can afford to spend more on research which allows them to stay ahead of their competitors
BP spent nearly £500 million in 2014

Question 39

What is external economies of scale

Answer 39

The benefits a firm might get from being a member of an industry or being located in a certain area.
They are always due to factors out of the firms direct control

Question 40

What are some examples of external economies of scale

Answer 40

• Better transport links to offices
• Ecucation and training facilities
• Location, If an area has a good reputation for a certain indusrtry it is likely to attract companies due to advantages like skilled labour. E.g. Silicon valley