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MicroEconomics > 4 - Production, Costs and Revenue > Flashcards

4 - Production, Costs and Revenue Flashcards

1
Q

What is Specialisation?

A

A worker only performing one task or a narrow range of tasks, or a firm specialising in one type of goods or services.

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2
Q

What is Division of Labour?

A

Different workers performing different tasks.

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3
Q

What did Adam Smith explain?

A

The idea that a single production unit could increase if workers specialised at different tasks in the manufacturing process.

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4
Q

Why does output increase with specialisation?

A

A worker doesn’t need to switch between tasks, saving time. Better machinery can be employed, deepening capital.

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5
Q

Why does the system of trade exist?

A

Because specialisation couldn’t be economically worthwhile without it, as workers can’t survive on only what they produce.

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6
Q

Why do workers trade a surplus of goods?

A

Workers produce more than they need for themselves.

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7
Q

What is Bartering?

A

People living in rural communities, trading surplus products through exchange of goods.

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8
Q

What does Bartering require?

A

A ‘double coincidence of wants,’ meaning farmers must require the service they exchange for, and people providing service must require the goods they exchange for.

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9
Q

Why does Bartering only work in small communities?

A

Because not everyone in society has a double coincidence of wants, making it more effective.

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10
Q

What was Adam Smith’s pin factory theory?

A

Someone not educated in pin making could make only one pin a day. If one person completes one part of the process, then another does the next and so on, it makes the process more efficient.

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11
Q

What are the consequences of the division of labour?

A

The increase of dexterity in every workman. The saving of time lost from going from one operation to another. The invention of greater machines, allowing one man to do the work of several stages.

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12
Q

What is Production?

A

The total output of goods and services produced by an individual firm or country. Converting raw materials and services of factors of production into outputs.

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13
Q

What are the four factors of production?

A

Land, Labour, Capital, Enterprise.

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14
Q

What is Enterprise?

A

Entrepreneurs, who decide what to produce, how to produce and who to produce it for.

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15
Q

What is Labour Productivity?

A

Output per worker per period of time.

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16
Q

What is Capital Productivity?

A

Output per unit of capital.

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17
Q

Why is Labour productivity important in manufacturing industries?

A

It measures how many units of a product manufacturers are making.

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18
Q

What was Rover’s productivity, compared to Nissan?

A

33 cars per worker per year, compared to 98 per worker per year in Nissan.

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19
Q

When was Rover forced to close?

A

In 2005.

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20
Q

What is the Productivity Puzzle?

A

The fact that UK productivity hasn’t recovered since the global financial crisis.

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21
Q

What are the reasons for low productivity?

A

Inadequate investment in capital goods, low wages, employers keeping workers on during the recession.

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22
Q

What is a Firm?

A

A business enterprise that either produces or deals in and exchanges goods or services.

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23
Q

What are the different times, when referring to production?

A

Very short run, short run, long run, very long run.

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24
Q

What is the very short run?

A

Where all factors of production are fixed - on a particular day, labour is fixed.

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25
What is the short run?
Where one factor of production is fixed - a time period of fewer than 4-6 months.
26
What is the long run?
Where all factors of production of a firm are variable, a time period of more than six months.
27
What is the very long run?
All factors of production are variable, additional factors outside the control of the firm can change, a period of several years.
28
What are average returns?
Total production/Quantity of factors of production.
29
What are Marginal returns?
The quantity of production increased when one unit of factor of production is added or removed.
30
What does the law of diminishing returns state?
As a variable factor is added to a fixed factor of production, both marginal and average returns to the variable factor begin to fall.
31
What are Returns to scale?
The rate at which output changes if the scale of all factors of production are changed.
32
What are increasing returns to scale?
If an increase in scale of all factors of production causes a more than proportionate increase in output.
33
What are Constant returns to scale?
If an increase in the scale of all factors of production causes the same increase in output.
34
What are decreasing returns to scale?
If an increase in the scale of factors of production causes a less than proportionate increase in output.
35
What are Economies of Scale?
Falling long run average costs of production that result from an increase in the size or scale of the firm.
36
What are diseconomies of scale?
Rising long-run average costs of production.
37
Why is the short run ATC curve a U-Shape?
Because of the assumption that labour becomes more productive, because of the law of diminishing returns.
38
What are Internal economies of Scale?
They occur when a firm, or a plant within a firm, increases its' scale and size.
39
What are External economies of scale?
They occur when average of unit costs of production fall, because of the growth of an industry or market which the firm is a part of.
40
What are Technical economies of Scale?
Generated through changes to productive progress, as scale of production and output levels increase.
41
What are the causes of technical economies of scale?
Indivisibilities, Spreading of R and D costs, volume economics, economies of massed resources, economies of vertically linked processes, Managerial economies of scale, marketing EOS, Financial EOS.
42
What is Indivisibility?
The idea that there is a certain minimum size below which they can't operate.
43
Why does Technical economies of scale lead to Spreading of R and D costs?
Large plants mean R and D costs can be spread over a much longer production run.
44
What is Economies of Massed resources?
A number of identical machines means that fewer spare parts need to be kept.
45
What is Economies of Vertically linked processes?
Much manufacturing activity involves a large number of related tasks and processes, from the purchase of raw materials.
46
What is Managerial economies of Scale?
The larger the scale of a firm, the greater its' ability to benefit from specialisation, and division of labour. A large firm can benefit from a functional division of labour.
47
What is Marketing economies of scale?
Bulk buying, bulk marketing economies - large firms can use their market power to buy supplies at lower prices.
48
What is Financial economies of scale?
Large firms can borrow from banks and other institutions at a lower rate of interest.
49
What is Risk bearing economies of Scale?
Large firms are less exposed to risk than small firms, risks can be grouped and spread.
50
What are the different types of Diseconomies of scale?
Managerial DOS, Communication failure, Motivational DOS.
51
What are Managerial diseconomies of scale?
Administration becomes more difficult, as a firm grows in size. Delegation means that inexperienced people make bad decisions.
52
What is Communication failure?
The idea that there may be too many layers of management between top managers and ordinary production workers, staff can feel remote.
53
What are Motivational Diseconomies of Scale?
Larger firms make it more difficult to satisfy and motivate workers, and workers may have to perform repetitive tasks.
54
What do increasing returns to scale lead to?
Falling long run average costs or economies of scale. Decreasing returns to scale bring rising long run average costs.
55
What are External economies of scale produced by?
Cluster effects, occurring when many firms in the same industry are located close to each other.
56
What does an exhaustion of benefits of economies of scale lead to?
It doesn't lead to the onset of diseconomies of scale.
57
What is Long run marginal cost?
The additional cost incurred if a firm increases output, when all factors of production are variable.
58
When will the LRAC curve fall?
When long run marginal costs fall, and are below long run average costs.
59
What is the Minimum efficient scale?
The lowest output at which long run average costs have been reduced to the minimum level that can be achieved.
60
What is Total revenue?
All the money a firm earns selling the total output of a product.
61
What is Average Revenue?
Total revenue/Output.
62
What is Marginal revenue?
The addition to total revenue resulting from the sale of one more unit of output.
63
What happens to Average revenue at each level of sales?
The average revenue the retailer earns is the same as the price charged.
64
What is the relationship between average and marginal revenue?
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 = the average, the average is constant.
65
What happens to Average and Marginal revenue in perfect competition?
A large number of buyers and sellers, where all buyers and sellers possess perfect information about what is going on in the market. Consumers can buy as much as they wish.
66
What happens in perfect competition if the firm raises its' selling price above the market price?
Customers desert the firm to buy the identical products available from other firms at the ruling market price.
67
What happens to Average/Marginal revenue in a monopoly?
Demand curve for a monopolists' output is the AR curve. If the monopolist is a price maker, choosing to set the price at which the product is sold - demand curve dictates maximum output.
68
What happens to price in a monopoly when they change output?
A downward sloping AR curve forces the monopolist to reduce selling prices to P2. This reduces the price at which all units of output are sold.
69
What is Profit?
The difference between total sales revenue and total cost of production.
70
What is Profit maximisation?
Occurs at the level of output at which total profit is greatest.
71
What is normal profit?
The minimum level of profit necessary to keep established firms in the market.
72
What is abnormal profit?
Extra profit over and above normal profit.
73
What are the roles of profit in a market economy?
Creation of worker incentives, creation of shareholder incentives, resource allocation, reward for innovation, source of business finance.
74
How does profit create worker incentives?
Using profit related pay and performance related pay, to increase worker motivation, to make workers work harder.
75
How does profit create shareholder incentives?
Leads to high dividends or distributed profit being paid out to shareholders who own companies.
76
How does profit help allocate resources?
High profits made by incumbent firms in a market create incentives for new producers to enter the market and for existing firms to supply more of a good or service.
77
How does profit act as a reward for innovation?
If entrepreneurs believe that innovation can result in high profits in the future, they invest.
78
How does profit act as a source of business finance?
Retained profits are the most important source of finance for firms undertaking investment projects.
79
What is the effect of technological change on methods of production?
Simplification of production means that human beings operate the machines that are used to produce goods.
80
How does technological change affect productivity?
Productivity may fall rather than increase, if the system can work properly. In general, technological change increase labour productivity.
81
How does technological change affect efficiency?
Dynamic efficiency results from improvements in products and services, innovation and the process of creative destruction.
82
How does technological change affect costs of production?
In the long run, firms can invest in new capital equipment and technology.

MicroEconomics (17 decks)

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