3 - Production, Costs and Revenue

Question 1

Production?

Answer 1

Converts inputs into output of g/s

Question 2

Short run production?

Answer 2

occurs when a firm adds variable factors of production to fixed factors of production

Question 3

Long run production?

Answer 3

occurs when the firm changes the scale of all the factors of production

Question 4

Productivity?

Answer 4

Output per unit of input

Question 5

Improving labour productivity by:

Answer 5

Better training

More experience

Improved technology

Specialisation

Question 6

Calculations

Answer 6

PROFIT

= total revenue - total cost

TOTAL COST

= total fixed costs + total variable costs

AVERAGE COST

= total cost / quantity

AVERAGE FIXED COST

= total fixed cost / quantity

AVERAGE VARIABLE COST

= total variable cost / quantity

MARGINAL COST

= difference between total cost at current output level and total cost at one unit less

Question 7

Specialisation

Answer 7

Workers become experts in a particular field of work

Question 8

Advantages of specialisation

Answer 8

• better quality products
• achieve economies of scale
• more efficient production
• reduced training costs
• better labour productivity

Question 9

Disadvantages of specialisation

Answer 9

• repetitive tasks
• countries can become less self-sufficient
• lack of flexibility

Question 10

Economies of scale

Answer 10

As output increases, long run average cost falls and the size of the firm grows

Question 11

Internal economies of scale

Answer 11

TECHNICAL

• specialise workers
• production line methods
• invest in specialist technologies

PURCHASING

• large firms need large quantities of raw materials so often negotiate discounts with suppliers

MANAGERIAL

• employ specialist managers to improve productivity efficiently

FINANCIAL

• large firms can borrow money at lower interest rate

RISK BEARING

• large firms can diversify into different product areas/markets

= leads to overall demand

MARKETING

• advertising is a fixed cost
• benefit from brand awareness

= trusted by consumers

Question 12

External economies of scale

Answer 12

LOCAL COLLEGES MAY OFFER QUALIFICATIONS NEEDED BY BIG LOCAL EMPLOYERS

= reduces training costs

LARGE COMPANIES LOCATING IN ONE AREA

= leads to improvements in road networks / transport

FIRMS DOING SIMILAR THINGS THAT ARE LOCATED NEAR EACH OFHER

= share resources

SUPPLIERS MAY LOCATE THERE TOO

= reduces transport costs

Question 13

Diseconomies of scale

Answer 13

As a firm increases in size, average costs rise as output

Question 14

Internal diseconomies of scale

Answer 14

• wastage can increase as materials may seem in plentiful supply
• lack of control from managers
• difficult to coordinate between departments
• difficult to communicate as the firm grows

Question 15

External diseconomies of scale

Answer 15

As a whole industry becomes bigger, prices of raw materials increase

Question 16

Division of labour?

Answer 16

Different workers perform different tasks in producing a g/s

Question 17

Money?

Answer 17

• can be used as a medium of exchange

Money is efficient as it can be exchanged for any g/s required

Question 18

Reasons for diseconomies of scale

Answer 18

Managerial DOS

• bigger firm = difficult to control

Competition failure

• contributes to Managerial DOS
• works feel alienated