3.1.3 - Production, Costs And Revenue

Question 1

Define production

Answer 1

Processes that converts inputs (or services of FOP) into outputs of goods

Question 2

Define productivity

Answer 2

Output per unit of input

Question 3

2 ways of measuring productivity?

Answer 3

1. Labour productivity
   Output per worker
2. Capital productivity
   Outlet per unit of capital

Question 4

Define productivity gap

Answer 4

Difference between Labour productivity in UK and other developed countries

Question 5

Define specialisation

Answer 5

Involves workers only performing a narrow range of tasks

Question 6

Division of Labour

Answer 6

Whereby a production process can be broken down into separate tasks

Question 7

Advantages and disadvantages of specialisation?

Answer 7

Advantages:
- higher output
- higher quality
- more opportunities for economies of scale

Disadvantages:
- work becomes repetitive
- potentially more structural unemployment
- over reliant on specialism

Question 8

Define absolute advantage

Answer 8

Occurs when a country can produce more of a good with the same factor of inputs

Advantages of this:
- lower average costs
- outward PPF curve shift

Disadvantages:
- lesser developed countries might use up their non-renewables
- countries could become over dependant on this export

Question 9

What are costs of production like in the short run, and their definitions (4)?

Answer 9

Capital is typically fixed, and becomes more variable in the long run

Fixed costs:
in the short run don’t change with output i.e rent

Variable costs:
In the short run do change with changes in output

Total costs:
While costs of producing a particular output

Average costs:
Cost per unit

Question 10

What is the formula for Average Fixed Costs?

Answer 10

Total fixed costs
————————
Output

Question 11

What is the formula for average variable costs?

Answer 11

Total variable costs
——————————
Output

Question 12

Formula for average total costs?

Answer 12

Av. fixed costs + Av. variable costs

Question 13

What are the costs of production like in the long run?

Answer 13

None of the factors of production are fixed — they can all be varied

Question 14

Formula for long-run average costs?

Answer 14

Long run total costs
——————————
Output

Question 15

What is economies of scale? + list some internal & external EOS

Answer 15

It occurs when output increases as average costs fall (can be internal or external)

Internal economies of scale:
1. Managerial economies
2. Technical economies
3. Marketing economies
4. Risk-bearing economies
5. Economies of scope
6. Financial economies

External economies of scale:
Cost savings resulting from growth of the industry / market. They occur as a result of:

1. Clusters / networks
2. Training / education
3. Transport + communication links improve

Question 16

What is diseconomies of scale? + what are internal examples of this?

Answer 16

Occurs as output increases and long-run average costs rise (can be internal or external)

Internal:
1. Managerial diseconomies of scale
2. Motivational diseconomies of scale
3. Communication failure

Question 17

What is the formula for total revenue?

Answer 17

Price * quantity sold

Question 18

Formula for average revenue?

Answer 18

Total revenue
———————
Quantity sold

Question 19

Formula for profit?

Answer 19

Total revenue — total costs

Question 20

Why is the average revenue curve the same as a firms demand curve

Answer 20

AR =
Total revenue
———————
Quantity

Therefore

AR=
Quantity x Price
—————————
Quantity

Therefore

AR = Price

Therefore

AR shows relationship between price and quantity (is the same as the demand curve)

Question 21

What does it mean for a country to have a comparative advantage (in goods)

Answer 21

It means they can produce a good at a lower opportunity cost to another

Question 22

What are some advantages of the comparative advantage?

Answer 22

• greater world output, so there is a gain in economic welfare
• lower average costs (increased competition)
• increased supply of goods to choose from
• outward shift in PPF

Question 23

What are some disadvantages of the comparative advantage?

Answer 23

• less developed countries might use up here non-renewables too quickly
• countries could become over dependant on the export of one commodity I.e. wheat

Question 24

Name the 4 functions of money:

Answer 24

1. Medium of exchange;
   To replace bartering etc
2. A measure of value;
   Measures relative values of different goods and services
3. Store of value;
   Can be kept for a long time without expiring but must be proportional with inflation to retain value
4. Method of deferred payment;
   Money can be allowed for debts to be created: people can therefore pay for things later