2.6 Production Flashcards
What three groups can be producers?
- Individuals
- Firms
- Governments
What is the role of producers?
They are part of the supply aspect and aim to make a profit. They employ workers and pay wages.
How can individuals be producers? Give examples.
They can be producers of non-market goods such as cooking or cleaning. They can also be self-employed, for example being a plumber.
How can firms be producers?
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).
How can governments be producers? Give examples.
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.
What is production?
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.
What are the advantages of an increase in production?
- 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
What are disadvantages of an increase in production?
- 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
What is productivity?
It is a measure of efficiency in terms of output per unit of input.
How do you calculate productivity?
Total output ÷ Total input
How can productivity be increased?
- Workers can specialise
- Improving skills through education and training
- Investment in new technology and capital equipment
Why is high productivity important for firms?
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.
Why is high productivity important for governments?
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.
What are the costs of productivity?
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.
What is meant by total costs?
All the costs of a firm added together.
How do you calculate total costs?
Total costs = total fixed costs + total variable costs
TC = TFC + TVC
What is a fixed cost? Give two examples.
Fixed costs remain the same regardless of output levels and are usually based on time, such as rent and utility bills.
What is a variable cost? Give two examples.
Variable costs are costs that change as output changes. These can be raw materials and worker wages.
What is average cost and what does it show?
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.
How can you calculate average costs?
Average cost = total costs ÷ quantity
AC = TC ÷ Q
What does total revenue mean?
The total income of a firm from the sale of its goods and services.
How do you calculate total revenue?
Total revenue = price of product × quantity sold
TR = P × Q
What is average revenue?
It is the revenue per unit sold and is equal to the price.
How do you calculate average revenue?
Average revenue = total revenue ÷ quantity
AR = TR ÷ Q
What is profit?
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.
What is loss?
When a firm’s revenue is less than its costs.
How do you calculate profit/loss?
Profit/Loss = total revenue - total costs
P/L = TR - TC
What is the importance of costs?
- 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.
What is the importance of revenue?
- 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.
Why is profit important?
- Provides money for investment
- Acts as a signal for more resources needed in the firm
- Attracts investors in the future
Why is loss important?
- 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
What are economies of scale?
The cost advantages (fall in average costs) a firm can gain by increasing the scale of production.
What is the difference between external and internal economies of scale?
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.
Give 5 examples of economies of scale and explain them.
- Managerial - larger firms can employ more specialists
- Financial - larger firms can borrow money at lower interest rates
- Marketing - larger firms can promote products with their budget
- Technical - larger firms can afford better equipment
- Increased dimensions when volume increases faster than costs.
Give 4 more examples of internal economies of scale and explain them.
- Division of labour increases speed
- Bulk buying reduces average costs
- Research & Development is affordable to larger firms
- Risk-bearing is when firms spread risks by offering a wide range of products.
Name and explain 4 external economies of scale.
- Education and training facilities
- Location - area with a good reputation could attract more firms
- Transport - better transport links can reduce costs
- Concentration of firms - suppliers of parts may locate near main supplier
