4.1.4 Production, Costs And Revenue (exc 4.1.4.8) Flashcards
What does production do?
Converts inputs, or the services of factors of production into final output
What is productivity?
Output per unit of input
What is labor productivity?
Output per worker
What does the UK’s productivity gap refer to?
The difference between labor productivity between the UK and competitor countries
What are the benefits of specialization and division of labor?
- a worker will not need to switch between tasks so time will be saved
- practice makes perfect
- capital widening & capital deepening (more or new capital)
What is a drawback of the specialization or division of labor?
It involves de-skilling and the creation of boredom and demotivation among workers
What is the use of money?
It is used as a medium of exchange
How does specialization allow for an efficient exchange of goods and services?
Increases productivity which will increase average and marginal returns
What are total returns?
The whole output produced by all the factors of production
What are average returns?
Total output divided by the total number of workers employed
What are marginal returns?
The change in quantity of total output resulting from the employment of one more worker
What is the difference between the short run and the long run?
In the short run at least one of the factors of production is fixed
In the long run all factors of production are variable
What is the law of diminishing returns?
A short term law which states that as a variable factor of production is added to a fixed factor of production, eventually both the marginal and average returns to the variable factor will begin to fall
Why would productivity fall if you continue to add more of the variable factor to the fixed factor?
They will exhaust the fixed factor as it passes its productive capacity
What are returns to scale?
The rate at which output changes if the scale of all the factors of production is changed
What does increasing returns to scale mean?
When the scale of all the factors of production increases, output increases at a faster rate
% change in output > % change in input
What does constant returns to scale mean?
When the scale of all the factors of production increases, output increases at the same rate
% change in output = % change in input
What does decreasing returns to scale mean?
When the scale of all factors of production employed increases, input increases at a slower rate
% change in output < % change in input
What are fixed costs?
Cost of production which, in the short run, does not change with output
What are variable costs?
Cost of production which changes with the amount that is produced
What are examples of variable costs?
Cost of hiring labor
Cost of buying raw material
What are examples of fixed costs?
Cost of maintaining the firm’s building
Initial cost of acquiring buildings
What is the total cost?
All the costs incurred when producing a particular size of output
Equation for total costs
TC = total fixed cost + total variable cost
What is the average variable cost?
Total variable cost / quantity of output
What is the marginal cost?
The addition to total cost resulting from producing one extra unit of output
Equation for average total cost
ATC = average fixed cost + average variable cost
Equation for average fixed cost
AFC = TFC / Q
Where is the point of diminishing marginal returns in a table?
The number BEFORE the decrease
What are factor prices?
Prices that a firm pays for hiring the different factors of production
What are internal economies of scale?
Cost saving resulting from the growth of the firm
What are external economies of scale?
Cost saving from the growth of the industry which the firm is part of
Examples of internal economies of scale
Technical economies of scale - bringing in special machinery to boost productivity
Financial economies of scale - As a firm grows it becomes able to buy raw materials in bulk so discounts can be negotiates
Marketing economies of scale
Examples of external economies of scale
Transportation development
Tax breaks from governments
What are reasons for diseconomies of scale?
- Managers don’t know what they are doing (managerial diseconomies of scale)
- Communication failure
- workers losing motivation (motivational diseconomies of scale)
What is marginal revenue?
the change in revenue from selling one extra unit of output
What is average revenue?
Total revenue divided by quantity of output
What is total revenue?
All the money received by a firm from selling its total output
Equation for average revenue
AR = TR / Q
Equation for marginal revenue
Change in TR / change in Q
What curve is the average revenue curve also?
The demand curve
What happens to average revenue when marginal is greater than average?
Average revenue increases
What happens to average revenue when marginal is less than average?
average revenue falls
What happens to average revenue when marginal is equal to the average?
Average revenue does not change
How can increasing marginal revenue be shown?
Total revenue curve gets steeper
What is profit?
The difference between total revenue and total costs
AND
The reward for enterprise
What is normal profit?
The minimum profit a firm must make to stay in business and fund factors of production
Does not attract firms to the market
What is abnormal profit?
The extra profit over and above normal profit
Attracts new firms into the market
What is the role of profit in a market economy?
Creates worker incentive (performance related pay)
Creates shareholder incentives ( high dividends)
A reward for enterprise
