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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
What are fixed costs?
Costs that do not vary with output and cannot be changed in the short run
26
What are variable costs?
Costs that vary with output and can be changed in the short run
27
What is the total cost?
Fixed costs + variable costs
28
What is the marginal cost?
The addition to total cost from making one more unit of output
29
How is average fixed cost calculated?
Fixed cost / quantity
30
How is average variable cost calculated?
Variable costs / quantity
31
How is average total cost calculated?
Total cost / quantity
32
What is the likely business action if there are low wages levels and high capital costs?
Employ more staff and invest less in machines
33
What is the likely business action if labour costs are high and capital is cheap?
Invest in capital
34
What is the likely business action if there are high labour costs and high capital costs?
Invest in capital
35
What are economies of scale?
As output increases, LRAC tends to fall
36
What are diseconomies of scale?
As output increases, LRAC often will eventually rise
37
What does an LRAC envelope curve (falling->flat->rising) show?
It shows increasing, then constant, then decreasing returns to scale
38
What does a flat LRAC curve show?
It shows constant returns to scale e.g. for personal services
39
What does a decreasing LRAC curve show?
- It shows increasing returns to scale - Shows a natural monopoly, such as utilities (electricity/water)
40
What are internal economies of scale?
As a firm increases output in the long run, average cost decreases
41
What are examples of internal economies of scale?
- 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
What are internal diseconomies of scale?
As a firm increases output in the long run, average cost will increase
43
What are examples of internal diseconomies of scale?
- Difficulties in coordinating and managing production - Communication failure - Motivation problems, decreasing quality
44
What are external economies of scale?
As an industry increases output, average cost for firms decrease
45
What are examples of external economies of scale?
- Access to skilled labour - More infrastructure in an area - Increased growth of suppliers
46
What are external diseconomies of scale?
As an industry increases output, average cost for firms increase
47
What are examples of external diseconomies of scale?
- Price inflation for factors of production, such as wages - Congestion of infrastructure, such as roads
48
What is the Minimum Efficient Scale (MES)?
- The minimum long run output level at which average cost is minimised for a firm - Applies to natural monopolies
49
What is revenue?
The income for a business, usually from sales
50
How is revenue calculated?
Revenue = price x quantity R = P x Q
51
How is average revenue calculated?
Total revenue / Quantity TR/Q
52
What is marginal revenue?
The addition to total revenue from selling one more unit
53
When MR > 0, what is TR doing?
TR is rising
54
When MR < 0, what is TR doing?
TR is falling
55
When is TR at its maximum?
When MR = 0
56
What are features of perfect competition?
- Many buyers and sellers - Firms are price takers - Products are homogenous (similar/interchangeable) - Low/no barriers for entry/exit - Perfect information
57
What is an example of a market with perfect competition?
A fruit/veg market
58
What are features of a monopoly (imperfect competition)?
- One price making firm in the industry - Unique product - no substitutes - High barriers to enter/exit - Potentially imperfect/asymmetric information
59
What is profit and how is it calculated?
- The difference between total revenue and total costs - Profit = TR - TC
60
What are the roles of profit in a market economy?
- To fund investment for organic growth - To reward enterprise - To reward business risk - Profit motive decides resource allocation in free market
61
What is normal profit?
Profit that is just enough to keep the entrepreneur in business (covering all costs)
62
What is abnormal/supernormal profit?
Profit that is more than enough to keep the entrepreneur in the industry, typically gained in imperfect competition in the long run
63
At what quantity of output is profit always maximised?
At Q MR = MC
64
What is the difference between invention and innovation?
- Invention refers to creating new ideas - Innovation is the application of new ideas to improve business opportunities
65
What is the supply-side effect of technological change?
New technology can improve efficiency/production, decreasing production costs and therefore AC decreases
66
What is the demand-side effect of technological change?
New products and new markets are generated
67
What is the benefit of technology change?
It can be sustaining, such as the internet improving communication, lowering average costs
68
What is the negative of technology change?
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 (19 decks)

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