4.1.4 - Production, costs and revenue

Question 1

Define production?

Answer 1

• Involves the converting inputs ( e.g raw materials) into outputs ( things to sell)

Question 2

define productivity?

Answer 2

Productivity is a way of measuring hiw efficently a company is producing it’s output
- output per unit of input employed

Question 3

What is labour productivity?

Answer 3

It is one example of measuring productivity for one factor
- it’s the amount og output produced per worker

Question 4

How can labour productivity be improved?

Answer 4

• Training
• More exxperience
• Improved technology

Question 5

What is specialisation and when does it occur?

Answer 5

• 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

Question 6

What are the advantages of specialisation?

Answer 6

• 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.

Question 7

What are disadvantage of specialisation?

Answer 7

• 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.

Question 8

How important is specialisation for trade?

Answer 8

• 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

Question 9

Wha is one way a country can get what it needs because it doesn’t produce it anymore?

Answer 9

• 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

Question 10

What is the differnce between the short run and long run law of diminishing returns?

Answer 10

• 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.

Question 11

What is the difference between marginal, average and total returns?

Answer 11

• 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)

Question 12

When does the law of diminishing returns occur?

Answer 12

In the short run

Question 13

Explain the law of diminishing returns?

Answer 13

• 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

Question 14

What does the law of diminishing returns assume?

Answer 14

• The law assues that firms have fixed factor resources in the short run and that the state of technology remains constant,

Question 15

What does return to scale refer to?

Answer 15

To the change in output of a firm after an increase in factor inputs.

Question 16

What happens when the returns of scale increases?

Answer 16

• 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.

Question 17

What happens when theres a decreasing returns to scale?

Answer 17

• 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.

Question 18

What is constant returns to scale?

Answer 18

• Constant returns to scale are when output increases by the same amount that input increases by.

Question 19

What is the difference between fixed and variable costs?

Answer 19

• 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,

Question 20

What is the difference between the marginal, average and total costs?

Answer 20

• 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

Question 21

what is the difference between short run and long run costs?

Answer 21

• 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 .

Question 22

Why are the short run cost curves shaped like that?

Answer 22

Law of diminishing returns

Question 23

Why are the long run cost curves shaped like that?

Answer 23

Economies of scale and diseconomies of scale

Question 24

How can factor prices and productivity affect firms cost of production and their choice of factor inputs?

Answer 24

• 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

Question 25

What is internal economies of scale?

Answer 25

• These occur when a firm becomes larger.
• Average cost of production falls as output increases.

Question 26

What are some examples of internal economies of scale?

Answer 26

• Really fun mums try making pies ( check pmt)
• Risk bearing
• Financial
• Managerial
• Technological
• Marketing
• Purchasing-

Question 27

What are external economies of scale?

Answer 27

• 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.

Question 28

What are diseconomies of scale and when do they occur?

Answer 28

• These occur when an output passes a certain point and average cost starts to increase per extra unit of output produced.

Question 29

What are some examples of diseconomies of scale?

Answer 29

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

Question 30

What is the relationship between returns to scale and economies or diseconomies of scale?

Answer 30

• 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

Question 31

What does the L shaped long run average cost curve show?

Answer 31

• The diagram above shows the relationship between the SRAC and the LRAC curve.