4.1.4 Production, costs and revenue

Question 1

What is production

Answer 1

Production is the process of converting inputs (e.g., capital, labor)

Question 2

What is Productivity

Answer 2

Productivity measures output per unit of input, e.g labor productivity is output per worker

Question 3

What are the benefits of specialisation and division of labour?

Answer 3

Increased efficiency, higher output, and lower costs due to workers focusing on specific tasks.

Question 4

How does money lead to specialisation?

Answer 4

Money facilitates the exchange of goods and services, enabling specialisation.

Question 5

What is the law of diminishing returns?

Answer 5

In the short run, adding more of a variable input to fixed inputs will eventually lead to smaller increases in output.

Question 6

What are returns to scale?

Answer 6

Returns to scale describe how output changes when all inputs are increased proportionally (increasing, constant, or decreasing)

Question 7

What is the difference between fixed and variable costs?

Answer 7

Fixed costs do not change with output (e.g., rent), while variable costs do (e.g., raw materials)

Question 8

What are economies of scale?

Answer 8

Cost advantages from increased production, leading to lower average costs.

Question 9

What are diseconomies of scale?

Answer 9

Increased average costs due to inefficiencies from large-scale production

Question 10

What is the minimum efficient scale?

Answer 10

The lowest output level where a firm can minimise long-run average costs

Question 11

What is marginal revenue?

Answer 11

The additional revenue from selling one more unit of output

Question 12

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

Answer 12

Average revenue=price, which reflects the demand for the firm’s product

Question 13

What is the difference between normal and abnormal profit?

Answer 13

Normal profit covers opportunity cost, while abnormal(supernormal) profit exceeds this

Question 14

What does profit incentivise in a market economy?

Answer 14

Profit incentivises innovation, efficiency and resource allocation.

Question 15

What is the difference between invention and innovation?

Answer 15

Invention is creating a new product, whilst innovation is the commerical application

Question 16

How does technological change affect markets?

Answer 16

It can improve production methods, create new products/markets and destroy existing markets through creative destruction.

Question 17

Name all internal economies of scale, w/ breif explanation

Answer 17

1. Technical EoS, larger firms can invest in better machinery, reducing per-unit cost
2. Mangerial EoS, larger firms can hire specialized managers, improving efficiency
3. Financial EoS, Larger firms can borrow money at lower interest rates (less risk)
4. Marketing EoS, bulk buying and selling reduce costs (discounts on raw mats)
5. Risk-Bearing EoS, larger firms can diversify products/markets, spreading risk.
6. Purchasing EoS, buying inputs in bulk reduces costs per unit.

Question 18

Name all external economies of scale w/ brief explanation

Answer 18

Skilled labor, access to a large pool of specialized workers.

Infrastructure, improved transport, communication and utilities benefits all firms.

Supplier Networks, Growth of specialized suppliers reduces input costs.

Knowledge spillovers, firms benefit from shared research, innovation and expertise.

Collaboration, firms in the same industry may collaborate, reducing costs (e.g, joint R&D)
R&D, research and development e.g pharmceutical, tech, automotive.