4. Production, costs and revenues - micro

Question 1

Production

Answer 1

Converts inputs or factor services into outputs of goods and services

Question 2

Productivity gap

Answer 2

The difference between labour productivity e.g. in the Uk and in other developed countries

Question 3

Productivity

Answer 3

Output per unit of input

Question 4

Labour productivity

Answer 4

Output per worker

Question 5

Capital productivity

Answer 5

Output per unit of capital

Question 6

Specialisation

Answer 6

A worker only performing one task or a narrow range of tasks. Also, different firms specialising in producing different goods or services

Question 7

Division of labour

Answer 7

Different workers perform different tasks in the course of producing a good or service
Adam Smiths pin factory

Question 8

Marginal returns of labour

Answer 8

Change in the quantity of total output resulting from the employment of one more worker, holding all other factors of production fixed

Question 9

Law of diminishing marginal returns
(Law of diminishing marginal productivity)

Answer 9

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.

Question 10

Total returns

Answer 10

The whole output produced by all factors of production, including labour, employed by a firm.

Question 11

Average returns of labour

Answer 11

Total output divided by the total number of workers employed

Question 12

Returns to scale

Answer 12

The rate by which output changes if the scale of all factors if production is changed

Question 13

Increasing returns to scale

Answer 13

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

Question 14

Constant returns to scale

Answer 14

When the scale of all factors of production employed increases, output increases at the same rate.

Question 15

Decreasing returns to scale

Answer 15

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

Question 16

Fixed cost

Answer 16

Cost of production which, in the SR, doesn’t change with output.

Question 17

Variable cost

Answer 17

Cost of production which changes with amount that is produced in the SR.

Question 18

Average fixed cost

Answer 18

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

Question 19

Average total cost (average cost)

Answer 19

Total cost if producing a particular level of output, divided by the size of output
ATC = (AFC + AVC) / Q

Question 20

Marginal cost

Answer 20

Addition to total cost resulting from producing one additional unit of output.

Question 21

Economies of scale

Answer 21

As output and size of plant increases, LRAC falls

Question 22

Diseconomies of scale

Answer 22

As output and size of plant increases, LRAC rises

Question 23

Internal economies and diseconomies of scale

Answer 23

Changes in the LRAC resulting from changes in the size or scale of a firm or plant.

Question 24

External economy of scale

Answer 24

A fall in LRAC of production resulting fro growth id the market or industry of which the firm is part of.

Question 25

external diseconomy of scale

Answer 25

An increase in LRAC of production resulting from the growth of the market or industry of which the firm is part of.

Question 26

Technical economies of scale

Answer 26

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

Question 27

Managerial economies of scale

Answer 27

Internal economy of scale: a large firm can benefit from functional divisions of labour, the employment of specialist managers.

Question 28

Marketing economies of scale

Answer 28

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.

Question 29

Financial or capital-rising economies of scale

Answer 29

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

Question 30

Risk-bearing economies of scale

Answer 30

Internal economy of scale: large firms are usually less exposed to risk than smaller firms, because risk can be grouped and spread.

Question 31

Economies of scope

Answer 31

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.