4.1.4 production costs and revenues Flashcards
what is production
converts inputs or the services of factors of production such as capital and labour, into final inputs- goods and services
define productivity
output per unit of input
define labour productivity
output per worker
define specialisation
the concentration of production on a narrow range of goods and services
5 advantages of specialisation
efficient production, exports, growth
wider range of goods (eg Dyson)
allocative efficiency
increased productivity
increased quality
4 disadvantages of specialisation
if finite resources used up, firm could shut
change in tastes could lead to firm shutting
deindustrialisation
national interdependence
define division of labour
breaking down the production process into seperate tasks upon specialisation
3 advantages of specialisation of workers
more productive workers decreasing costs
specialist capital can be used
lower prices, increased quality
4 disadvantages of specialisation of workers
demotivation of workers
high worker turonover
risk of LT unemployment from tech advances
standardised goods and services
define trade
buying or selling of goods and services
define exchange
to give something in return for something else recieved
money is the medium of exchange
why is exchange necessary when specialising
so people can consume outside of their specialisation
define the short run (micro)
scale of production is fixed
at least one fixed cost
define the long run (micro)
scale of production is flexible
all costs are variable
marginal returns
the extra output gained from one extra unit of input/factor employed
average return
output per unit of input
total returns
total output produced by a number of factors
what is the law of diminishing returns
in the short run when variable factors (labour) are added to a stock of fixed factors (land) total and marginal product will initially rise and then fall
when is total product maxed
when marginal product…
equals zero
returns to scale
change in output of a firm in response to a change in factor inputs
constant returns to scale
output rises by same amount as input
increasing returns to scale
output rises by a greater proportion than to the increase in inputs
decreasing returns to scale
output rises by less than input has risen
fixed costs
costs do not vary with output
eg rent
variable costs
change with output
eg raw materials
marginal costs
cost of producing one extra unit
average cost
cost per unit
total cost/quantity
total costs
total variable costs + total fixed costs
short run costs
fixed and variable factors
long run costs
all factors of production are fixed
if factors inputs become more productive what happens to cost of production
decreases
if average costs per unit of a factor (eg labour) increases what will firms do
switch to cheaper inputs (eg capital)
explain shape of marginal cost
initially decreases due to increased specialisation then increases due to diminishing returns
explain shape of average cost
reflects economies and diseconomies of scale
U shape
explain shape of total cost
steady rise due to total fixed costs decreasing output
define economies of scale
cost advantages a firm gains from increasing output
define internal economies of scale
when a firm becomes larger, average cost of production falls as output increases
types of internal economies of scale (6)
risk bearing
financial
managerial
technological
marketing
purchasing
risk bearing economies of scale
can expand a production range as they have more to fall back on
financial economies of scale
banks are more willing to lend loans to larger firms
managerial economies of scale
larger firms are more able to specialise which decreases cost of production
technological economies of scale
larger firms can afford to invest in productive capital
marketing economies of scale
larger firms can divide their marketing budget across output
purchasing economies of scale
larger firms can bulk buy which is cheaper
define external economies of scale
cost advantages for multiple firms
infrastructure external economies of scale
transport services can decrease cost of production
knowledge/labour pool external economies of scale
concentration of labour and knowledge sharing can incraese productivity and drive down costs of production
supplier network external economies of scale
clusters of related businesses can lead to a strong supplier network
real example of external economies of scale
Media City- Salford
define diseconomies of scale
output passes a certain point and average cost starts to increase
reasons for diseconomies of scale (3)- explained
control: becomes harder to monitor workforce productivity as firm becomes larger
coordination: harder to coordinate workers to tasks when there are more
communication: workers may feel alienated leading to demotivation and decreased productivity which will increase costs
what occurs at minimum point on LRAC curve
minimum efficient scale
optimum levcels of output and economies of scale have been utilised
explain the shape of the L shaped average cost curve
to begin with, cost per unit falls as output increases due to economies of scale
even if their are disceonomies of scale (managerial) these are offset by tecnological/purchasing/etc economies of scale
and therefore in LR costs continue to fall even in they are falling at a slower rate
define total revenue
revenue gained from the sale of a given quantity
how do you calculate TR
price x quantity
define average revenue
average receipt per unit
it is equal to the price
how do you calculate TR
AR X Q
define marginal revenue
extra revenue earned from the sale of one extra unit
why is the AR curve the firms demand curve
AR is the price of the good
when firms are price takers it is completely horizontal
calculate MR
change in TR/change in quantity
define profit
differnce between TR and TC
define normal profit
minimum reward required to keep entreupeners supplying the enterprise
when TR=TC
profit is zero
define supernormal profit
when TR>TC
exceeds the value of opp cost when investing funds into the firm
role of profit in free market economy
rewards entreperunes when taking risks and investing
can be retaiend by firms and reinvested which is cheaper than dealing with IR when borrowinh
acts as a signal for firms and consumers
invention
the process of creating a new product or new way to make a product
innovation
improving or contributing to existing products
technological change impact on efficiency and productivity
increases efficiency and productivity
technological change can lead to the…
development of new products, new markets and may destroy existing markets
explain creative destruction
by Joeseph Schuempter
new entreuprenurs are innovative which challenges existing firms, the more productive firms grow and the least productive firms are forced to leave the market
this leads to an overall expansion of the economies PPF
innovation in monopolies
monopolies do not have incentive to innovate as they have no competition, meaning they are often inefficient and costs arre higher than they could be
innovation in oligopolies
oligopolies have more incentive (than monopolies) to innovate, since they are earning supernormal profit and are trying to get ahead of there competitors
thus technological change is fast in oligopolies
