4.1.4 - Production, costs and revenue Flashcards
Define production?
- Involves the converting inputs ( e.g raw materials) into outputs ( things to sell)
define productivity?
Productivity is a way of measuring hiw efficently a company is producing it’s output
- output per unit of input employed
What is labour productivity?
It is one example of measuring productivity for one factor
- it’s the amount og output produced per worker
How can labour productivity be improved?
- Training
- More exxperience
- Improved technology
What is specialisation and when does it occur?
- Specialisation occurs when each worker completes a specific task in production process.
- The concept suggest how through the division of labour, worker producivity can increase and then firms can take adavantage of increased efficeny and lower average cost of production
What are the advantages of specialisation?
- Higher ouput and higher quality, since production focusses on what people and businesses are best at
- There could be greater variety of goods and services produced
- There are more opportunities for economies of scale, so the size of market increases.
- There is more competition and this gives the incentive for firms to lowet their costs which helps keep prices down.
What are disadvantage of specialisation?
- Work becoes repetitive, which could lower the motivation of workers, potentially affecting quality and productivity. Workers could become dissatisfied
- Ther ecould be more structural unemployent since skills migh not be transferrable., especially if workers have focussed one task for too long
- Producing a lot of one type of good through specialisation , variety could decrease for consumers.
How important is specialisation for trade?
- It becomes absoulutley vital
- Economies have to be able to obtain things theya re no longer making themselves this means it is necessary to have a way of exhanging goods and services between countries
Wha is one way a country can get what it needs because it doesn’t produce it anymore?
- Swapping goods with other countries is one way a country can get what it needs ( Barter system) It is very inefficent because it takes time and effort to find traders to barter with.
- Most efficent way is using money ) with the use of exchange rates . Money is a medium of exchange it something both buyers and sellers value
What is the differnce between the short run and long run law of diminishing returns?
- In the short run, the scale of production is fixed ( there’s at least one fixed cost).
- In the long run, the scale of production is flexible and can be changed. All costs are variable.
What is the difference between marginal, average and total returns?
- The marginal return of a factor such as labour is the extra output derived per extra unit of the factor employed
- The average return factor is the output per unit of input. This is output per worker over a period of time
- The total return of a factor is the total output ptoduced by a number of units of factors over a period of time. ( amount of capital is fixed)
When does the law of diminishing returns occur?
In the short run
Explain the law of diminishing returns?
- The variable factor could be increased in the short run
- For example, firms might employ more labour. Over time, the labour will become less productive , so the marginal return of the labour falls. An extra unit of labour adds less to the total output than the unit of labour before.
- Therefore, total output still rises nutit increases at a slower rate
- This is linked to labour productivity
What does the law of diminishing returns assume?
- The law assues that firms have fixed factor resources in the short run and that the state of technology remains constant,
What does return to scale refer to?
To the change in output of a firm after an increase in factor inputs.
What happens when the returns of scale increases?
- It increases when the output increases by a greater proportion to the increase in inputs.
- For example, if inputs doubles ad output quadruples there is an increasing returns of scale.
What happens when theres a decreasing returns to scale?
- A doubling of inputs leads to a 1. increase in output this is a decreasing returns of scale
- This can link to diseconomies of scale since it occurs when the firms become less productive.
What is constant returns to scale?
- Constant returns to scale are when output increases by the same amount that input increases by.
What is the difference between fixed and variable costs?
- Fixed costs are costs which do not vary with output (e.g rent, advertising. They are indirect.
- Variable costs change with output. They are direct costs, Eg the cost of raw material increases as the out0put increases,
What is the difference between the marginal, average and total costs?
- The marginal costs of production is the cost of producing one extra unit of output.
- The average costs are the costs per unit and is calculated by:
Average costs= total costs/ Quantity produced. - The total costs is the cost to produce at a given level of output= The total variable costs + total fixed costs
what is the difference between short run and long run costs?
- In the short run at least one factor of production cannot chnage this means there are some fixed costs
- In the long run, all factor inputs can chnage this means all costs are variable .
Why are the short run cost curves shaped like that?
Law of diminishing returns
Why are the long run cost curves shaped like that?
Economies of scale and diseconomies of scale
How can factor prices and productivity affect firms cost of production and their choice of factor inputs?
- If factor inputs become more productive, firms can produce ore output with a smaller input . This lowers unit of cost of production.
- As the average cost per unit of one factor input rises firs are likely to switch to cheaper factor inputs
What is internal economies of scale?
- These occur when a firm becomes larger.
- Average cost of production falls as output increases.
What are some examples of internal economies of scale?
- Really fun mums try making pies ( check pmt)
- Risk bearing
- Financial
- Managerial
- Technological
- Marketing
- Purchasing-
What are external economies of scale?
- These occur within the industry
- For example, Local roads might be improved so traqnsport costs for the local industries will fall.
- There might be more training facilities or more research and development.
What are diseconomies of scale and when do they occur?
- These occur when an output passes a certain point and average cost starts to increase per extra unit of output produced.
What are some examples of diseconomies of scale?
control- Harder to monitor how peoductive the workforce is
cordination- It’s harder and complicated to cordinae every worker
communication- Workers could feel excluded as firms grow which can lead to falls in productivity and increase in average costs
What is the relationship between returns to scale and economies or diseconomies of scale?
- Returns to scale increases when the output increases by a greater proportion to the increases in output. This occurs when there are economies of scale and factor inputs become more productive
-Decreasing returns of scale is linked to dises=conomies of scale since it occurs when factor inputs become less productive
What does the L shaped long run average cost curve show?
- The diagram above shows the relationship between the SRAC and the LRAC curve.
