4.1.4 Production, costs and revenue

Question 1

What factors affect the level of productivity?

Answer 1

-competition: increased competition forces firms to become more productively efficient.
-advances in technology
-increased specialisation
-increased spending on education and training leading to gains in labour productivity
-improved infrastructure in transport and communication

Question 2

Average cost calculation

Answer 2

• the cost per unit
• total cost/output

Question 3

Fixed costs definition

Answer 3

costs which do not vary as the level of production increases or decreases

Question 4

How is short-run defined?

Answer 4

a period of time when at least one of the factors of production is fixed

Question 5

How is long-run defined?

Answer 5

a period of time when all factors of production are variable

Question 6

Total costs calculation

Answer 6

• sum of all costs of production
• fixed costs + variable costs

Question 7

Marginal revenue definition

Answer 7

additional revenue gained by a firm from selling an additional unit of output

Question 8

Define diminishing marginal returns to a fixed factor

Answer 8

• adding an additional factor of production results in smaller increases in output
• when one input in the production of a commodity is increased while all others are held fixed, eventually the additional input results in no extra product

Question 9

What is a real life example illustrating the law of diminishing returns?

Answer 9

coffee shops; they operate in the short run where land and capital are fixed. these stores face the law of diminishing returns if they over employ staff during busy times. more baristas are confined by a lack of workspace and machines whereas more waiters employed are confined by a lack of walking space and tables. labour productivity, after a point, will fall with each worker hired reducing marginal product.

Question 10

Define economies of scale

Answer 10

falling average costs of production as a result of increasing output levels

Question 11

Outline internal EoS (as output rises long run average costs fall)

‘Really Fun Mums Try Making Pies’

Answer 11

occur within a business’ control; a business can exploit them as they get larger.

Risk bearing
Financial
Managerial
Technical
Marketing
Purchasing

in each case; total costs rise but quantity rises much faster therefore AC will be decreasing as a result.

Question 12

Outline external EoS

Answer 12

occur outside a firm but within an industry.

-improvement in transport infrastructure: as a business becomes larger, transport infrastructure may improve in the locality of a business, reducing costs of production for the business, consequently decreasing total costs and thus the unit cost of production.
-material suppliers move closer to where a business is located: as a business grows in size there is a greater chance of material suppliers moving closer to the location of business which would reduce the cost of accessing raw materials reducing total costs and thus the unit cost of production.
-R&D firms move close to where businesses are located: as a business grows in size there is a greater chance of R&D hubs developing close by, with businesses benefitting from the innovation and research and development that can reduce their total costs and/or increase the productivity of their capital thus reducing the unit cost of production.

Question 13

Define diseconomies of scale

Answer 13

an economic disadvantage such as increase in costs arising from an increase in the size of an organisation

Question 14

What are 3 reasons for diseconomies of scale? (as output rises long run average costs fall)

Answer 14

-communication: with managers having more staff in their team to manage and monitor, workers will realise the difficulty and shirk more at work reducing productivity thus increasing total costs more than output thus increasing unit costs
-coordination: the increased time taken to streamline the production process reduces efficiency and productivity, which increases average costs as total costs rise by more than output.
-motivation: the larger a business becomes, the more workers feel alienated and a less significant part of the workforce which demotivates them and impacts their morale reducing productivity thus increasing average costs as total costs rise by more than output.

Question 15

What are the four functions of profit?

Answer 15

• finance for investment
• market entry
• demand for factor resources
• signals about the health of the economy

Question 16

What is the law of diminishing marginal returns?

Answer 16

as successive units of a variable factor are applied to a fixed factor, the total output will increase but at a diminishing rate

Question 17

What is meant by the division of labour?

Answer 17

when specialisation has taken place and the production process is broken down into separate tasks

Question 18

Give 4 advantages of the division of labour

Answer 18

-workers become very good at their job: they repeat the task numerous times w/ no other responsibilities which increases productivity translating into greater production, potentially higher quality products and higher wages, making workers feel valued
-significant time savings: workers will be focussing on their specific part of the production process with very high productivity - productive efficiency for the businesses improves, reducing their costs of production
-workers that are very good at specific tasks can be given specialist capital which is cost effective: the productivity of workers can increase even more translating into greater production, higher quality products and higher wages
-consumers benefit with lower prices of goods produced where labour is divided: with higher labour productivity, time savings and effective capital machinery going to the right workers, costs of production will decrease for the firm

Question 19

Give 4 limitations of the division of labour

Answer 19

• unrewarding: repetitive work that requires little skill lowers motivation and hits productivity
• mass produced standardised goods lack variety for consumers
• many people may choose to move to less boring creating a problem of high worker turnover
• some workers may receive little training and may not be able to find alternative jobs if they find themselves out of work - they may then suffer from structural unemployment

Question 20

What is specialisation?

Answer 20

the concentration of production on a narrow range of goods or services

Question 21

What are the 4 gains for specialisation

Answer 21

• higher output: total production of goods and services is raised and quality can be improved
• variety: consumers have access to greater variety of higher quality products
• a bigger market: specialisation and global trade increase the size of the market offering opportunities for economies of scale
• competition and lower prices: increased competition acts as an incentive to minimise costs, keep prices down and therefore maintains low inflation

Question 22

What are 4 losses for specialisation

Answer 22

-finite resources: resources required in production may run out where firms and countries that rely on specialisation would suffer greatly from lost revenue and reduced economic growth
-changes in fashion/tastes: firm that specialises in producing a product/service that is reliant on fashionable demand will suffer from lost revenue if fashion and/or tastes change
-de-industrialisation: if through specialisation, another country becomes able to produce the same goods/services at a lower cost, therefore possessing a cost advantage, industries in the initial country would decline and unemployment would increase greatly
-national interdependence: if there is conflict between trading partners this could threaten the benefits of specialisation through reduced exports of goods made and imports of goods required

Question 23

What is the concept of the minimum efficient scale of production?

Answer 23

the lowest output possible at which all economies of scale have been exploited and the firm achieves productive efficiency

Question 24

Why is the average revenue curve the firm’s demand curve?

Answer 24

because the average revenue curve is the price of the good

Question 25

What is the relationship between average and marginal revenue?

Answer 25

when demand is perfectly elastic, marginal revenue = average revenue

Question 26

What is the difference between invention and innovation?

Answer 26

invention is the process of creating a new product or a new way to make a product whereas innovation is the act of improving or contributing to existing products