4. Production, costs and revenue Flashcards
What is production?
Converts inputs or factor services into outputs of goods and services
What are the factors of production?
Inputs into the production process, such as land, labour, capital and enterprise
What is a productivity gap?
The difference between labour productivity, e.g. in the UK and in other developed economies
What is productivity?
Output per unit of input
What is labour productivity?
Output per worker
What is capital productivity?
Output per unit of capital
What is a firm?
A productive organisation which sells its output of goods and/or services commercially
What is the key concept in the short-run production theory?
The law of diminishing returns, also known as the law of diminishing marginal productivity
What is specialisation?
A worker only performing one task or a narrow range of tasks. Also, different firms specialising in producing different goods or services
What is the division of labour?
The concept goes hand in hand with specialisation. Different workers perform different tasks in the course of producing a good or service
What is trade?
The buying and selling of goods and/or services
What is exchange?
To give something in return for something else received. Money is a medium of exchange
What are marginal returns of labour?
The change in the quantity of total output resulting from the employment of one more worker, holding all the other factors of production fixed
What is the law of diminishing marginal returns (also known as the law of diminishing marginal productivity)?
A short-term law which states that as a variable factor of production is added to a fixed factor of production, both the marginal and eventually the average returns to the variable factor will begin to fall
What are total returns?
The whole output produced by all the factors of production, including labour, employed by a firm
What are the average returns of labour?
Total output divided by the total number of workers employed
What are returns to scale?
The rate by which output changes if the scale of all the factors of production is changed
What is a plant?
An establishment, such as a factory, a workshop or a retail outlet, owned and operated by a firm
What are the increasing returns to scale?
When the scale of all the factors of production employed increases, output increases at a faster rate
What are the constant returns to scale?
When the scale of all the factors of production employed increases, output increases at the same rate
What are the decreasing returns to scale?
When the scale of all the factors of production employed increases, output increases at a slower rate
What is the key concept in short-run production theory?
The law of diminishing returns
What is the law that states what happens as a variable factor of production is added to a fixed factor of production?
That eventually both the marginal returns and then the average returns to the variable factor of production begin to fall
What is fixed cost?
The cost of production which, in the short run, does not change with output
What is variable cost?
The cost of production which changes with the amount that is produced, even in the short run
What is total cost?
All the cost incurred when producing a particular size of output
What is average variable cost?
Total variable cost divided by the size of output
What is marginal cost?
Addition to total cost resulting from producing one additional unit of output
What are average fixed costs?
The total cost of employing the fixed factors of production to produce a particular level of output, divided by the size of output
What are average total costs (average cost)?
The total cost of producing a particular level of output, divided by the size of output
Where are the short-run and long-run cost curves derive from?
Short/long-run production theory
What are short-run costs made up of?
Fixed costs and variable costs
What are economies of scale?
As output increases, long-run average cost falls
What are diseconomies of scale?
As output increases, long-run average cost rises
What are the internal economies and diseconomies of scale?
Changes in long-run average costs of production resulting from changes in the size or scale of a firm or plant
What is external economy of scale?
A fall in long-run average costs of production resulting from the growth of the market or industry of which the firm is a part
What is external diseconomy of scale?
An increase in long-run average costs of production resulting from the growth of the market or industry of which the firm is a part
What can technical economies of scale be caused by?
Indivisibilities, the spreading of research and development costs, volume economies, economies of massed resources, economies of vertically linked processes
What are some of the various types of economies of scale?
Technical, managerial and finance-raising economies
What are some of the various types of diseconomies of scale?
Communicational failure and motivational diseconomy of scale
In cost theory what are economies and diseconomies of scale often respectively caused by?
Increasing and decreasing returns to scale (in production theory)
What is total revenue?
All the money received by a firm from selling its total output
What is average revenue?
Total revenue divided by output
What is marginal revenue?
Addition to total revenue resulting from the sale of one more unit of the product
What is perfect competition?
A market that displays the six conditions of: a large number of buyers and sellers; perfect market information; the ability to buy or sell as much is desired at the ruling market price; the inability of an individual buyer or seller to influence the market price; a uniform or homogeneous product; and no barriers to entry or exit in the long run
What is a monopoly?
One firm only in a market
When do marginal and average curves plotted from the same set of data always display the following relationship?
- When the marginal is greater than the average, the average rises
- When the marginal is less than the average, the average falls
- When the marginal equals the average, the average is constant, neither rising nor falling
What is a price-taker?
A firm which is so small that it has to accept the ruling market price. If the firm raises its price, it loses all its sales; if it cuts its price, it gains no advantage
What is a price-maker?
When a firm faces a downward-sloping demand curve for its product, it possesses the market power to set the price at which it sells the product
What is a quantity-setter?
When a firm faces a downward-sloping demand curve for its product, it possesses the market power to set the quantity of the good it wishes to sell
What is revenue?
The money that a firm earns when selling its output
What does the nature of a firm’s revenue curves depend on?
The competitiveness of the market struvture in which the firm sells its output
In perfect competition, what are the average and marginal revenue curves like?
Horizontal
In monopoly where do the average revenue curve and the marginal revenue curve?
The average revenue curve slopes downward and the marginal revenue curve below the average revenue curve
What is normal profit?
The minimum profit s firm must make to stay in business, which is, however, insufficient to attract new firms into the market
What is profit?
The difference between total sales revenue and total cost of production
What is profit maximisation?
Occurs at the level of output at which total profit is greatest
What is abnormal profit (also known as supernormal profit and above-normal profit)?
Profit over and above normal profit
What are the roles in a market economy?
Creating incentives, rewarding innovation and risk taking
What is technological change?
A term used to describe the overall effect of invention, innovation and the diffusion or spread of technology in the economy
What is invention?
Making something entirely new; something that did not exist before at all
What is innovation?
Improves on or makes a significant contribution to something that has already been invented, thereby turning the results of invention into a product
What is productive efficiency?
For the economy as a whole occurs when it is impossible to produce more of one good without producing less of another. For a firm it occurs when the average total cost of production is minimised
What is dynamic efficiency?
Measures improvements in productive efficiency that occur in the long run over time
What is monopolistic competition?
A market structure in which firms have many competitors, but each one sells a slightly different product
What is duopoly?
Two firms only in a market
What is creative destruction?
Capitalism evolving and renewing itself over time through new technologies and innovations replacing older technologies and innovations
What is technical progress?
Applying scientific and engineering knowledge, as it develops, to produce goods which are more efficient and work better
What is creative destruction?
A process through which capitalism evolves and renews itself over time through new technologies and innovations replacing older technologies and innovations
