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AQA A Level Economics > 4.1.4 Production costs and revenues > Flashcards

4.1.4 Production costs and revenues Flashcards

1
Q

What is the process of production?

A

Converting inputs into outputs

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2
Q

What are the inputs in production?

A

The Factors of Production:
1. Land - natural resource
2. Labour - human resource
3. Capital - man-made resource
4. Enterprise - organisation of other FOP for production to make profit, taking risk

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3
Q

What is productivity?

A

The output per unit of input per time period

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4
Q

What is labour productivity?

A

The output per worker hour

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5
Q

What is the productivity puzzle in the UK?

A

The UK has very low productivity

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6
Q

What are the effects of the UK’s very low productivity?

A
  • Lower average income
  • Lower standard of living
  • More imports & less exports (worse trade balance)
  • Less tax revenue (austerity)
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7
Q

What is specialisation?

A

When individuals or countries focus on one specific task, usually within a production process

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8
Q

What are the benefits of the division of labour?

A

Increased efficiency, leading to lower prices and therefore a higher standard of living

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9
Q

Why does specialisation increase efficiency?

A
  • Less time wasted switching tasks
  • Expertise developed in individual tasks
  • Expertise with dedicated capital
  • Easy to learn one task
  • Innovation - workers can identify how to improve
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10
Q

What are the negatives of specialisation?

A
  • Boredom leading to demotivation
  • Health issues
  • Dependent on all workers being present
  • Workers get limited expertise
  • One person making mistakes can lead to all product being ruined and/or a high cost of quality control
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11
Q

What else do countries also have to do if they specialise in one product, in order to access other products?

A

Trade

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12
Q

Why do we use money as a ‘medium of exchange’?

A

Trading using barter (exchange of products) requires a ‘coincidence of wants’

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13
Q

What is the short run?

A

The period of time within which at least one factor of production is fixed, such as capital or land

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14
Q

What is the long run?

A

The period of time within which all FOP are variable in quantity

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15
Q

What does marginal mean?

A

The addition to the total value (e.g. output) from adding an additional unit of another input

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16
Q

What is the law of diminishing returns?

A

As units of a variable input are added, the marginal output (first rises but) eventually falls

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17
Q

Is diminishing returns short or long run?

A

Short run as at least one FOP is fixed

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18
Q

What is returns to scale?

A

As a firm increases quantity of output, average cost will (first fall but) eventually rise

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19
Q

Is returns to scale short or long run?

A

Long run as all FOP are variable

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20
Q

If the marginal production is greater than 0, what effect does this have on the total production?

A

Total production is rising

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21
Q

When does total production peak?

A

When marginal production = 0

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22
Q

When the marginal production is greater than the average production, what is the average production doing?

A

Average production is rising

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23
Q

At what point is marginal production equal to average production?

A

The highest value of average production

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24
Q

What point is marginal cost equal to average cost?

A

The lowest value of average cost, productive efficiency

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25
Q

What are fixed costs?

A

Costs that do not vary with output and cannot be changed in the short run

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26
Q

What are variable costs?

A

Costs that vary with output and can be changed in the short run

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27
Q

What is the total cost?

A

Fixed costs + variable costs

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28
Q

What is the marginal cost?

A

The addition to total cost from making one more unit of output

29
Q

How is average fixed cost calculated?

A

Fixed cost / quantity

30
Q

How is average variable cost calculated?

A

Variable costs / quantity

31
Q

How is average total cost calculated?

A

Total cost / quantity

32
Q

What is the likely business action if there are low wages levels and high capital costs?

A

Employ more staff and invest less in machines

33
Q

What is the likely business action if labour costs are high and capital is cheap?

A

Invest in capital

34
Q

What is the likely business action if there are high labour costs and high capital costs?

A

Invest in capital

35
Q

What are economies of scale?

A

As output increases, LRAC tends to fall

36
Q

What are diseconomies of scale?

A

As output increases, LRAC often will eventually rise

37
Q

What does an LRAC envelope curve (falling->flat->rising) show?

A

It shows increasing, then constant, then decreasing returns to scale

38
Q

What does a flat LRAC curve show?

A

It shows constant returns to scale e.g. for personal services

39
Q

What does a decreasing LRAC curve show?

A
  • It shows increasing returns to scale
  • Shows a natural monopoly, such as utilities (electricity/water)
40
Q

What are internal economies of scale?

A

As a firm increases output in the long run, average cost decreases

41
Q

What are examples of internal economies of scale?

A
  • Purchasing - bulk buying means a cheaper cost per unit
  • Technological - big firms can buy best tech equipment
  • Marketing - big firms can advertise more effectively and efficiently
  • Financial - big firms can borrow at lower interest rates and for longer time
  • Managerial - big firms can afford better managers to be more efficient
  • Specialisation - division of labour, such as on production lines
  • Risk bearing (economies of scope) - big firms can diversify
  • Research + development - big firms can devote more funds to research and development
  • Technical - e.g. double dimensions = 4x cost = 8x capacity, also applies for transport/ containerisation
42
Q

What are internal diseconomies of scale?

A

As a firm increases output in the long run, average cost will increase

43
Q

What are examples of internal diseconomies of scale?

A
  • Difficulties in coordinating and managing production
  • Communication failure
  • Motivation problems, decreasing quality
44
Q

What are external economies of scale?

A

As an industry increases output, average cost for firms decrease

45
Q

What are examples of external economies of scale?

A
  • Access to skilled labour
  • More infrastructure in an area
  • Increased growth of suppliers
46
Q

What are external diseconomies of scale?

A

As an industry increases output, average cost for firms increase

47
Q

What are examples of external diseconomies of scale?

A
  • Price inflation for factors of production, such as wages
  • Congestion of infrastructure, such as roads
48
Q

What is the Minimum Efficient Scale (MES)?

A
  • The minimum long run output level at which average cost is minimised for a firm
  • Applies to natural monopolies
49
Q

What is revenue?

A

The income for a business, usually from sales

50
Q

How is revenue calculated?

A

Revenue = price x quantity
R = P x Q

51
Q

How is average revenue calculated?

A

Total revenue / Quantity
TR/Q

52
Q

What is marginal revenue?

A

The addition to total revenue from selling one more unit

53
Q

When MR > 0, what is TR doing?

A

TR is rising

54
Q

When MR < 0, what is TR doing?

A

TR is falling

55
Q

When is TR at its maximum?

A

When MR = 0

56
Q

What are features of perfect competition?

A
  • Many buyers and sellers
  • Firms are price takers
  • Products are homogenous (similar/interchangeable)
  • Low/no barriers for entry/exit
  • Perfect information
57
Q

What is an example of a market with perfect competition?

A

A fruit/veg market

58
Q

What are features of a monopoly (imperfect competition)?

A
  • One firm in the industry - price makers
  • Unique product - no substitutes
  • High barriers to enter/exit
  • Potentially imperfect/asymmetrical information
59
Q

What is profit and how is it calculated?

A
  • The difference between total revenue and total costs
  • Profit = TR - TC
60
Q

What are the roles of profit in a market economy?

A
  • To fund investment for organic growth
  • To reward enterprise
  • To reward business risk
  • Profit motive decides resource allocation in free market
61
Q

What is normal profit?

A

Profit that is just enough to keep the entrepreneur in business (covering all costs)

62
Q

What is abnormal/supernormal profit?

A

Profit that is more than enough to keep the entrepreneur in the industry, typically gained in imperfect competition in the long run

63
Q

At what quantity of output is profit always maximised?

A

At Q MR = MC

64
Q

What is the difference between invention and innovation?

A
  • Invention refers to creating new ideas
  • Innovation is the application of new ideas to improve business opportunities
65
Q

What is the supply-side effect of technological change?

A

New technology can improve efficiency/production, decreasing production costs and therefore AC decreases

66
Q

What is the demand-side effect of technological change?

A

New products and new markets are generated

67
Q

What is the benefit of technology change?

A

It can be sustaining, such as the internet improving communication, lowering average costs

68
Q

What is the negative of technology change?

A

It can be disruptive, such as Amazon replacing high street, Uber replacing taxis, Apple Pay replacing cash/cheques, and Air BnB replacing hotels

AQA A Level Economics (21 decks)

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