2.6 Production

Question 1

What three groups can be producers?

Answer 1

• Individuals
• Firms
• Governments

Question 2

What is the role of producers?

Answer 2

They are part of the supply aspect and aim to make a profit. They employ workers and pay wages.

Question 3

How can individuals be producers? Give examples.

Answer 3

They can be producers of non-market goods such as cooking or cleaning. They can also be self-employed, for example being a plumber.

Question 4

How can firms be producers?

Answer 4

Firms may sell locally or internationally. Smaller firms are usually in competitive markets, whereas larger firms may be monopolies or oligopolies (and have more power over the market).

Question 5

How can governments be producers? Give examples.

Answer 5

The government is responsible for services such as defence, public transport and education. Some of these sectors are privatised, but some are not willing to pay.

Question 6

What is production?

Answer 6

The total output of goods and services produced by a firm or industry in a period of time. It involves the use of factors of production.

Question 7

What are the advantages of an increase in production?

Answer 7

• Increase in employment
• Increased profits and market share
• Rise in standard of living as there is more to buy
• Can gain larger economies of scale
• Economic growth in country

Question 8

What are disadvantages of an increase in production?

Answer 8

• Workers may be replaced with machines
• Workers who are replaced will have a lower standard of living
• Average costs may rise leading to diseconomies of scale
• Environmental problems

Question 9

What is productivity?

Answer 9

It is a measure of efficiency in terms of output per unit of input.

Question 10

How do you calculate productivity?

Answer 10

Total output ÷ Total input

Question 11

How can productivity be increased?

Answer 11

• Workers can specialise
• Improving skills through education and training
• Investment in new technology and capital equipment

Question 12

Why is high productivity important for firms?

Answer 12

Higher productivity will result in lower average costs, so firms can gain economies of scale and become more competitive. It also increases profits, leading to better training and more investment for the firm.

Question 13

Why is high productivity important for governments?

Answer 13

High productivity increases total output in the economy, leading to higher economic growth. The government can also gain tax revenue from higher employment and wages due to firms expanding.

Question 14

What are the costs of productivity?

Answer 14

There could be an increase in unemployment as workers are replaced by machines. This will also rise government spending on welfare benefits. The greater international competitiveness could lead to fall in GDP if countries retaliate.

Question 15

What is meant by total costs?

Answer 15

All the costs of a firm added together.

Question 16

How do you calculate total costs?

Answer 16

Total costs = total fixed costs + total variable costs

TC = TFC + TVC

Question 17

What is a fixed cost? Give two examples.

Answer 17

Fixed costs remain the same regardless of output levels and are usually based on time, such as rent and utility bills.

Question 18

What is a variable cost? Give two examples.

Answer 18

Variable costs are costs that change as output changes. These can be raw materials and worker wages.

Question 19

What is average cost and what does it show?

Answer 19

It is the cost of producing a unit of output. A fall in average costs leads to economies of scale and shows the firm is becoming more efficient.

Question 20

How can you calculate average costs?

Answer 20

Average cost = total costs ÷ quantity

AC = TC ÷ Q

Question 21

What does total revenue mean?

Answer 21

The total income of a firm from the sale of its goods and services.

Question 22

How do you calculate total revenue?

Answer 22

Total revenue = price of product × quantity sold

TR = P × Q

Question 23

What is average revenue?

Answer 23

It is the revenue per unit sold and is equal to the price.

Question 24

How do you calculate average revenue?

Answer 24

Average revenue = total revenue ÷ quantity

AR = TR ÷ Q

Question 25

What is profit?

Answer 25

The amount of money a seller has left behind after all the costs have been paid. This is when a firm has gained more revenue than it pays out in costs.

Question 26

What is loss?

Answer 26

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

Question 27

How do you calculate profit/loss?

Answer 27

Profit/Loss = total revenue - total costs

P/L = TR - TC

Question 28

What is the importance of costs?

Answer 28

• Costs rise as output increases, leading to an upward sloping supply curve.
• Firms control costs to try and make a bigger profit.
• If costs fall, firms can supply more at every price, increasing supply.

Question 29

What is the importance of revenue?

Answer 29

• Without revenue, producers cannot make a profit.
• Growth in revenue leads to greater profits that can be invested in the firm’s expansion.
• Steady revenue boosts worker confidence
• Allows firms to gain loans and overdrafts.

Question 30

Why is profit important?

Answer 30

• Provides money for investment
• Acts as a signal for more resources needed in the firm
• Attracts investors in the future

Question 31

Why is loss important?

Answer 31

• Continous loss results in firms closing
• In the short-term losses can be covered by loans or savings
• Acts as a signal for factors of production to move away from the firm

Question 32

What are economies of scale?

Answer 32

The cost advantages (fall in average costs) a firm can gain by increasing the scale of production.

Question 33

What is the difference between external and internal economies of scale?

Answer 33

Internal economies of scale refer to the growth of the firm itself, whereas external economies of scale are out of the firms control since they are benefits belonging to the industry or location.

Question 34

Give 5 examples of economies of scale and explain them.

Answer 34

1. Managerial - larger firms can employ more specialists
2. Financial - larger firms can borrow money at lower interest rates
3. Marketing - larger firms can promote products with their budget
4. Technical - larger firms can afford better equipment
5. Increased dimensions when volume increases faster than costs.

Question 35

Give 4 more examples of internal economies of scale and explain them.

Answer 35

1. Division of labour increases speed
2. Bulk buying reduces average costs
3. Research & Development is affordable to larger firms
4. Risk-bearing is when firms spread risks by offering a wide range of products.

Question 36

Name and explain 4 external economies of scale.

Answer 36

1. Education and training facilities
2. Location - area with a good reputation could attract more firms
3. Transport - better transport links can reduce costs
4. Concentration of firms - suppliers of parts may locate near main supplier