4.1.4 production, costs and revenue Flashcards
define production
The conversion of inputs/ factors of production into outputs in the production process
define productivity
output per unit of input employed in a given period of time
Define labour productivity
output per unit worker per hour/given period of time
state reasons for improved labour productivity
- increased specialisation and division of labour
- increased education and training
- increased investment in human capital
- improvements in performance in related pay - acts as incentive
what is productivity a measure of?
efficiency
define productivity gap
Difference in productivity levels between different countries
when is an economy productively efficient
when it can produce more of one good by producing less of another good
if all inputs/ factors of production are fully utilised to its maximum potential
give two impacts of improved productivity
output increases - economies of scale exploited
average costs falls
define specialisation
workers performing a narrow range of tasks
define division of labour
the production process broken down into smaller tasks
workers are assigned to particular tasks
what is money
Medium of exchange
how does specialisation benefit firms
specialisation increases productivity - this means lower costs of production therefore profit increases
how does specialisation benefit consumers
specialisation means lower opportunity cost of production therefore consumers buy increased quantity of goods and services at a lower price
explain the impact of a lower average cost as a result of increased specialisation
Increased supply
drawbacks of specialisation
- monotony
- higher wages for workers
- increased cost of production
- technical unemployment
- chances of overspecialsation
- lack of a flexible workforce
- countries become less self sufficient
- firms only specialise in one good or service
Negative impacts of specialisation on supply
excess supply
prices would have to be lowered to clear this supply
profits therefore decrease as a result
Define short run production
One FOP fixed- at least one fixed cost
all other FOP’s are variable - variable costs can change
The scale of production fixed
Maximum output produced due to fixed fop
define long run production
all costs and fops are variable
therefore scale of production variable
what is the only way the firm can increase output in the short run
Increasing labour
barter system
system of exchange in which goods or services are traded directly for other goods or services without the use of money
economic efficiency
when both productive and allocative efficiency are present - scarce resources being used in most efficient way from a consumer’s standpoint
Total Cost (TC)
The total expense incurred by a firm in producing and marketing a product.
Average Cost (AC)
cost per unit of output
Marginal Cost (MC)
the change in total costs associated with a one-unit change in output
fixed costs
costs that remain constant in the short run as output changes
variable costs
costs that vary with the quantity of output produced
TC =
FC + VC
average cost =
TC / output
(can be broken down into AFC and AVC)
average fixed cost =
FC / output
average variable cost =
VC / output
when is a firm most productively efficient?
when MC = AC
economies of scale (EoS)
reduction in long run AC resulting from an increase in the scale of production
diseconomies of scale (DoS)
increase in long run AC resulting from an increase in the scale of production
internal economies of scale
The cost benefits that an individual firm can enjoy when it expands
external economies of scale
The cost benefits that all firms in the industry can enjoy when the industry expands
technical economies of scale
reductions in average costs of production due to the use of more advanced machinery
marketing economies of scale
large firms purchasing its factor inputs in bulk at negotiated discounted prices
managerial economies of scale
Reductions in average cost as a result of being able to employ specialist managers who are more productive
financial economies of scale
A situation where large firms are able to borrow money on better terms than smaller firms which makes the cost of financing investment and therefore unit costs lower.
Agglomeration
Clumping together of industries for mutual advantage, in a distinct geographical location
Marginal Revenue (MR)
the extra revenue associated with selling an extra unit of output or the change in total revenue with a one-unit change in output
Average Revenue (AR)
total revenue divided by the quantity of the product sold (price)
total revenue
the total amount of money a firm receives by selling goods or services
price taker
a buyer or seller that is unable to affect the market price, operating in a very competitive market
price maker
A firm with some power to set the price because the demand curve for its output slopes downward; a firm with market power
risk bearing economics of scale
expanding product range to spread risk e.g. virgin
internal diseconomies of scale
occurs when firms growth begins to cause LRAC to increase decreasing returns to scale
IDEOS examples
wastage and loss
communication becomes harder
harder to communicate activity
external economy examples
- locals road improve as surrounding industry improves that
- more training/research and development facilities
average revenue
total rev ÷ quantity
ave rev = price
ave rev curve = demand curve
What is profit ?
Total revenue - total costs
