4.1.4 Production Costs and Revenue Flashcards
Production
The total output of goods and services produced by an individual, firm or country
Productivity
A measurement of the rate of production by one or more factors of production
Labour productivity
Total output per period of time/ number of units of labour
Ways to improve productivity
- better education/training
- better technology
- specialisation and division of labour
- increased motivation
Specialisation
When a worker completes a specific task in a production process
Pros of specialisation
+ higher output
+ higher quality
+ greater variety of goods and services produced
+ more opportunities for economies of scale
+ more competition so lower costs and prices
Cons of specialisation
- work is repetitive, workers become demotivated
- could be kore structural unemployment as skills may not be transferable
- variety could decrease for consumers
- there could be higher worker turnover for firms
Examples of countries which specialise in certain areas
Norway is one of the worlds largest oil exporters
Comparative advantage
When a country can produce a goof at a lower opportunity cost than another country
Absolute advantage
When a country can produce more of a good with the same factor inputs
Pros of specialisation in traded goods
+ greater world output so gain in economic welfare
+ lower average costs
+ increased supply of goods to choose from
+ outward shift in PPF curve
Cons of specialisation in traded goods
- less developed countries might use up their non- renewable resources too quickly
- countries become over dependant on the export of one commodity
Functions of money
- medium of exchange
- measure of value
- store of value
- method of deferred payment
Short run
Where at least one factor of production is fixed
Long run
All factors of production are variable
Different type of returns
- marginal returns- extra output derived per each extra unit of labour
- average returns- the output per unit of input
- total returns- the total output produced
The law of diminishing returns
When the marginal return of labour falls. Therefore the extra unit of labour adds less than the unit before. This can only occur in the short run
Types of returns to scale
- increasing RtS- an increase in input leads to a more than proportional increase in output
- constant RtS- an increase in input leads to a proportional change in output
- decreasing RtS- an increase in input leads to a less than proportional change in output
In the long run what is true of fixed costs?
They don’t exist all costs are variable
Fixed costs
Costs that don’t vary with output
Variable costs
Costs that change with output
Total costs
Fixed costs + variable costs
Average costs
Total costs/ quantity produced
Marginal costs
The cost of producing one extra unit of output
What shape is the short run average costs curve and why
U shaped due to diminishing returns since at least one of the factors of production is fixed, therefore marginal costs increase
Shape of long run average cost curve
L shaped, initially costs fall since firms take advantage of economies of scale but after MES costs rise due to diseconomies of scale however these are offset by economies of scale
Internal economies of scale
When a firm becomes larger average costs of production fall as output increases
What are the 6 examples of economies of scale
- Risk bearing- fiend can spread the cost of uncertainty
- Financial- banks lend cheaper loans to bigger businesses
- Managerial- they specialise labour
- Technological- can invest in better technology
- Marketing- costs of advertising is spread
- Purchasing- larger firms can buy in bulk
(Really Fun Mums Try Making Pies)
External economies of scale
These occur within the industry
Diseconomies of scale
When output passes a certain point and average costs start to increase per extra unit of output produced
What returns to scale do economies and diseconomies of scale have?
Economies of scale = increasing returns to scale
Diseconomies of scale = decreasing returns to scale
Describe the relationship between the SRAC curve and LRAC curve
• the LRAC curve envelopes the smaller u shaped SRAC curves and it always equals to or below the SRAC curve
What happens to the LRAC curve when there are external economies of scale
The curve shifts
Total revenue
Price x quantity sold
Average revenue
Total revenue/ quantity sold
Basically price
Marginal revenue
The extra revenue earned from the sale of an extra unit
When does AR=MR
In perfect competition when demand is perfectly elastic
Profit
Total revenue- total costs
Normal profit
When TR= TC
Abnormal profit
When TR>TC
Roles of profit in a market economy
- reward for entrepreneurs
- it incentives entrepreneurs to innovate and make better products
- profits can be held and used for later investment
- profits act as a signal to other other firms to join the market
Invention
The process of creating a new product or new way to make a product
Innovation
Improving or contributing to existing products
How can technological change affect productivity, efficiency and costs of production
- improves efficiency and productivity which lowers cost of production. This could also lead to better quality goods (mobile phones)
- creative destruction can occur (Netflix destroying blockbusters)
- productive firms stay in the market whilst others are forced out of it
