4. Production, costs and revenues - micro Flashcards
Production
Converts inputs or factor services into outputs of goods and services
Productivity gap
The difference between labour productivity e.g. in the Uk and in other developed countries
Productivity
Output per unit of input
Labour productivity
Output per worker
Capital productivity
Output per unit of capital
Specialisation
A worker only performing one task or a narrow range of tasks. Also, different firms specialising in producing different goods or services
Division of labour
Different workers perform different tasks in the course of producing a good or service
Adam Smiths pin factory
Marginal returns of labour
Change in the quantity of total output resulting from the employment of one more worker, holding all other factors of production fixed
Law of diminishing marginal returns
(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.
Total returns
The whole output produced by all factors of production, including labour, employed by a firm.
Average returns of labour
Total output divided by the total number of workers employed
Returns to scale
The rate by which output changes if the scale of all factors if production is changed
Increasing returns to scale
When the scale of all factors of production employed increase, output increases at a faster rate.
- is likely to lead to economies of scale - falling LRAC as output increases
Constant returns to scale
When the scale of all factors of production employed increases, output increases at the same rate.
Decreasing returns to scale
When all the factors of production employed increases, output increases at a slower rate.
- is likely to lead to diseconomies of scale - rising LRAC as output increases
Fixed cost
Cost of production which, in the SR, doesn’t change with output.
Variable cost
Cost of production which changes with amount that is produced in the SR.
Average fixed cost
Total cost of employing the fixed factors of production to produce a particular level of output, divided by the side of output.
AFC = TFC / Q
Average total cost (average cost)
Total cost if producing a particular level of output, divided by the size of output
ATC = (AFC + AVC) / Q
Marginal cost
Addition to total cost resulting from producing one additional unit of output.
Economies of scale
As output and size of plant increases, LRAC falls
Diseconomies of scale
As output and size of plant increases, LRAC rises
Internal economies and diseconomies of scale
Changes in the LRAC resulting from changes in the size or scale of a firm or plant.
External economy of scale
A fall in LRAC of production resulting fro growth id the market or industry of which the firm is part of.
external diseconomy of scale
An increase in LRAC of production resulting from the growth of the market or industry of which the firm is part of.
Technical economies of scale
An internal economy of scale: Generated through changes to the production process as scale and level of output increases:
- indivisibilities (there is a certain minimum size below which machinery cannot operate efficiently)
- the spread of R&D costs (reducing unit costs in LR)
- volume economies (increase in scale of plant provides scope for conservation of heat and energy)
- economies of massed resources
- economies of vertically linked processes
Managerial economies of scale
Internal economy of scale: a large firm can benefit from functional divisions of labour, the employment of specialist managers.
Marketing economies of scale
Internal economy of scale: bulk-buying and bulk-marketing economies. Large firms can use their market power to buy supplies at lower prices and also to market their products on better terms negotiated with wholesalers and retailers.
Financial or capital-rising economies of scale
Internal economy of scale: large firms can often borrow from banks and other financial institutions at a lower rate of interest and on better terms than those available to smaller firms
Risk-bearing economies of scale
Internal economy of scale: large firms are usually less exposed to risk than smaller firms, because risk can be grouped and spread.
Economies of scope
Internal economy of scale: factors that make to cheaper to produce a range of products together than to produce each one of them on its own.
