2.6 Production Flashcards
What is profit
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
What is the role of a producer
To make and supply goods and services
Why are producers important in the economic system
They both employ workers and pay workers wages
How can individuals act as producers
They can employ themselves and supply services such as child minding, cooking and cleaning
How can firms act as producers
They supply goods and servicers,
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
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
What is productivity
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.
What is an increase in production likely to lead to (5)
- Increase in employment (unless there is also increase in productivity)
- Increase in profits for the firm and the industry
- Larger economies of scale
- Economic growth
- Rise in standard of living as consumers have more goods and services to buy
How do you calculate productivity
Total output/ Total input
What can productivity depend on
(3)
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
Why is high productivity important
2 for firms
2 for governments
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
What are the costs of productivity (2)
- 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
How can producers increase productivity (3)
- Better education/ Training
- Better technology
- Workers specialising
What is total cost
All the costs of the firm added together
What is total revenue
The total income of a firm from the sale of all of their goods and services
What is average costs
The cost of producing a unit (unit cost of production)
How do you calculate total cost
Total cost = Total fixed costs + Total variable costs
How do you calculate average costs
Total cost / Quantity
How do you calculate total revenue
Price X Quantity
What is average revenue
The revenue per unit sold, also known as average price
What is a loss
When a firm’s total revenue is less than its total costs
What is profit maximisation
When there is the greatest difference between total revenue and total cost (in a positive way)
It is a main aim for firms
What is the importance of cost for producers
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
What is the importance of revenue for producers (4)
- It is a constant inflow of money and this means in the long run producers are able to make a profit and stay open.
- Growth in revenue encourages investors to invest in the firm- can lead to expansion
- 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
- It creates confidence in the firm and therefore workers are going to be more happy working there.
What is the importance of profit for producers (3)
- Profit is an indication of a more efficient use of resources and therefore indicates the success of investment of a firm.
- It signals to scarece resources to move to firms making the most profit.
- It is also a means to grow the business by investing
What is the importance of profits in a market economy
- 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
What is the importance of a loss for producers
Short term
long term
industry
- 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.
What are economies of scale
The cost advantages a firm can gain by increasing the scale of production, leading to a fall in average costs
What are internal economies of scale
Economies of scale that lead to growth of the firm itself, leading to cost saving and fall in average costs
Explain technical economies
Large firms can purchase specialist equipment which allows them to lower production costs.
Smaller firms cant do this because it costs too much
Explain economies of increased dimensions
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
Explain purchasing or bulk buying economies
Buying goods in bulk leads to a lower cost per unit. So the cost of materials fall
Explain division of labour
Different workers can be specialised to complete different tasks in a production process, so verall production time is faster
Explain financial economies
- 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
Explain Managerial economies
Larger firms can afford to employ specialist staff, like marketing or finance, which will increase productivity and lower costs
Explain marketing economies
Larger firms can use more expensive advertising campaignsthat reach more potential customers
This means the average cost of marketing per unit falling
Explain risk bearing economies
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
Explain Research and development economies
With stat on BP R&D
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
What is external economies of scale
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
What are some examples of external economies of scale
- 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
