4.1.4 - Production, Costs and Revenue Flashcards
What is the short run in terms of production
A period of time in which the availability of at least one factor of production is fixed (usually capital)
Fixed means it cant be changes easily
What is the long run in terms of production
A period of time which all of the factors of production can be varied
What does short and long run symbolise
It is not about a specific time
It is about the scale of production
Define marginal product
Is the extra output gained from hiring an additional unit of input (labour)
Define the law of diminishing marginal returns
Give an example
Where at a certain point an additional factor of production causes a relatively smaller increase of output
In a cafe when extra employees may lead to a lack of space and a decrease in output occurs
Where does diminishing marginal return occur for a business
Occurs in the short run when at least one factor of production is fixed.
What is the formula for average product
= total product / units of labour
What is the formula for marginal product
= change in total product / change in quantity of labour
Define total production
The total output of goods and services
Define productivity
The rate of production by one or more factors of production
What is the formula for productivity
Total output per period of time / number of units of FOP
Define specialisation
Where an individual worker, firm or country provides a limited range of goods and services
What is division of labour
Is specialisation at the level of an individual worker
What are the benefits of specialisation
Repetition of a limited range of activities can increase skill
Increased productivity as less time wasted moving between stations
Division of labour allows people to focus on their strengths
Define costs
Are the expenses a business must pay to secure the factors of production and obtain raw materials
What are fixed costs
Are costs of production which do not vary with the level of output in the short run
E.g. Rent and Insurance
What are variable costs
Costs which vary directly with the businesses level of output
E.g. Wages and Raw materials
What is the formula for average total costs
Total costs / output
What is the formula for average fixed costs
Fixed costs / output
What is the formula for average variable costs
Variable costs / output
What is marginal cost
What does it mean
Is the additional cost of making an additional unit of output
There becomes a point where output is not increasing but the marginal cost continues to increase
What is the formula for marginal cost
= Change in total costs / change in output
What is the relationship between marginal costs and marginal product
They are inversely proportional
This means that the marginal costs increase when there becomes a decrease in the marginal product (decrease in level of output) due to the law of diminishing return
What is the relationship between marginal product and total product
When marginal product = 0 ,total product is maximised
Why is the average fixed cost curve the way it is
As its costs do not change with output, as output grows the cost is spread so the AFC curve decreases with increased output
Why is the Average Variable Cost Curve the shape it is
There becomes a point where variable costs reach the point of the law of diminishing return and the AVC starts to rise to be able to i crease output , due to increased wages and raw materials for example
Why is the Average Total Cost Curve the shape it is
Is determined by the average variable cost curve and average fixed cost curve. It is influenced more by the AVC as it becomes a greater cost than the AFC
Why does the marginal cost curve cut the ATC and AVC curves at its minimum
When the MC curve rises due to the law of diminishing return it causes the ATC and the AVC to rise as well as they are averages, an extra unit which is bigger than the average will cause the average to rise as well
What are the causes for short run costs to shift
Give examples for :
i. Increase in the price of capital
ii. If wages increase because of a rise in minimum wage
Increases through the individual costs of fixed costs or variable costs
Increase in capital price leads to increase average fixed costs and therefore leads to increased average total costs
Increased wages leads to increased average variable costs and therefore increased average total costs and marginal costs
Define total revenue
Is the money a firm receives from selling its output
What is the formula for total revenue
Total revenue = price x quantity
What is the formula for average revenue
What does AR also mean
= Total revenue / quantity
Average revenue = price
Define marginal revenue
The addition to a firms total revenue from selling an additional unit of output
What is the formula for marginal revenue
= change in total revenue / change in output
What are the advantages and disadvantages of specialistion
A
Economies of scale
Higher productivity
Higher quality products
D
Specialised firms are not flexible
Workers may become bored (lack of motivation)
How does the marginal revenue curve work
Marginal revenue decreases when output is increased. There are smaller increases in revenue at each level of output
What is the relationship between marginal revenue and total revenue
When marginal revenue = 0 Total revenue is maximised
Total revenue continues to increase until marginal revenue is less than 0, because then they would be losing revenue.
Define Normal profit
Give an example of it
Is a situation where a firm makes enough profit to reward the entrepreneur for taking the risk and is to remain competitive. It implies zero economic profit
An example is that the owner could have made a salary of £50,000 in a normal job, therefore the entrepreneur needs to make £50,000 salary, included as a cost for the business
What is the formula for normal profit
Where does it occur in a graph
Normal profit is when total revenue = total costs
Occurs at an output where AR=AC
Define supernormal/economic profit
How do they know they are making it
Is profit above normal profit.
A firm is making supernormal profit if they have excess profits of what they need to remain competitive.
Define returns to scale
Is the relationship between increasing the firms inputs and the change it has on output
Explain increasing returns to scale
Is when a firms outputs have a greater change than its inputs
Decrease in AC
Explain constant returns to scale
When a firms outputs are identical to its inputs
AC stays the same
Explain decreasing returns to scale
When a firms outputs are less than the change in inputs
AC increase
Define Economies of scale
Is the reduced average total costs that firms experience by increasing its output in the long run
What is the link between returns to scale and economies of scale
Economies of scale cause decreased AC and therefore increasing returns to scale
Diseconomies of scale increase the AC causing decreasing returns to scale
What is the minimum efficient scale
The lowest level of output at which average costs are minimised
What are internal economies of scale
Are reductions in long run average costs arising from growth of the firm
What are the different internal economies of scale
Financial economies of scale : large firms are more likely to be offered cheaper loans wit low interest rates , reducing costs
Bulk buying- large firms buy in larger quantities, reducing the average cost
Technical economies of scale- large firms will invest in new technology as its cost effective
Marketing economies of scale- large firms have big advertising budgets which are spread out due to large output
Managerial economies of scale - large firms can use division of labour to achieve high productivity, reducing costs
What are external economies of scale
Give examples
Are reductions in long run average costs arising from the growth of the industry it operates in
E.g. better transport infrastructure , supplier moving closer
What are diseconomies of scale
When a firm has an increase in its average costs by increasing output in the long run
What are the reasons for diseconomies of scale (acronym )
3c’s and a M
Control - large businesses can lose control, less productivity
Communication - hard to communicate in large firms , time is wasted and there is less productivity
Coordination - hard to work together between departments in large firms
Motivation - lots of workers makes the individual worker feel less valued, less productivity
Explain the shape of the long run average cost curve
It is the joining of all the minimum points of the Short run average costs as they represent the possible points of production over time
Define Invention
Is the creation of a product or process
Define innovation
Is where products and production processes are developed into marketable goods or services
What are the effects of technological change
Can reduce firms long run costs
Can make markets more competitive
Define creative destruction
Is where technological change leads to development of new disruptive products which change existing products
