Business Economics Flashcards
What is production and what does it involve
Manufacturing something to sell
Involves converting inputs to outputs
What is an input (give an example)
Inputs are any of the four factors of production
E.g. raw materials, labour
What is productivity
A measure of how efficiently an economy or company is producing output
E.g. output per unit of input employed
Can be calculated for any one of the four factors of production
What is labour productivity
Output per worker or output per hour worked
How is labour productivity calculated
Labour productivity = amount of output produced in a particular time / total number of workers or total hours worked
Allows workers to be compared against other workers
What can improvements in productivity come as
Better training for workers
Specialisation
Experience
Improvements in technology
What are the advantages of specialisation
Specialise workers in what they’re good at
Leads to better quality and higher quantity of products for the same amount of effort overall
More efficient production
Disadvantages of specialisation
Doing repetitive tasks leads to boredom
Can lead to a lack of flexibility (e g. Coal mining in the UK)
What is specialisation
Means people or countries doing only the things they’re most efficient at
What becomes vital when countries specialise and why
Trade becomes vital as economies have to obtain things that they no longer make for themselves
What is the most efficient way of exchanging goods and services between countries
Money
What is money
A medium of exchange
Something both buyers and sellers value
What are the three functions of money
- measure of value
- store of value
- a standard or method of deferred payment
What is a firm
Any sort of business organisation
What is an industry
Where all firms provide similar goods or services
What is the cost of production
The economic cost of producing good
What is the short run
The period of time for atleast one factor of production to be fixed
Costs can be fixed or variable in the short rum
In the long run all costs are variable
What is the total cost
All the costs involved in producing a particular level of output
Total cost = total variable costs + total fixed costs
What is the average cost
Cost per unit produced
What is the equation for average cost
AC = TC ÷ Q
What is marginal cost
Cost of increasing output by one unit
The extra cost incurred as a result of producing the final unit of output
Draw the short run average cost curve with labels
….
What are economies of scale
The cost advantages of production on a large scale
What are the two types of economies of scale
Internal and external economies of scale
What are internal economies or diseconomies of scale
Changes within a firm
What are examples of internal economies of scale
- technical economies of scale (production line cost)
- purchasing economies of scale (negotiate discount with supplier)
- marginal economies of scale (employ specialist managers for taking care of different areas of the business)
- financial economies of scale (larger firms can often borrow more money at a lower rate of interest as banks see them as low risk)
- risk bearing economies of scale (larger firms can diversify into different product areas)
- marketing economies of scale (can afford more advertisement)
What are external economies or diseconomies of scale
Involve changes outside a firm
What are examples of external economies of scale
Local colleges offer qualifications -> reducing the firms training cost
Large companies in local areas can lead to improvements In road networks or local transportation
Examples of internal diseconomies of scale
Wastage + loss can increase
Communication can get more difficult
Examples of external diseconomies of scale
Industry becomes bigger -> price of raw materials increase as demand is greater
Buying large amounts of materials may not make them less expensive per unit
What is revenue
The money firms receive from selling their goods and services
What is total revenue (TR)
Total amount of money received within a given time period
What is the equation for total revenue
Total revenue = total quantity x price
What is the average revenue
Revenue per unit sold
What is the equation for average revenue
AR = TR ÷ Q
What does a firms demand curve determine
Determines how revenue relates to output
What is a price taker
A firms that has no power to control the price it sells at
Demand curve will be perfectly elastic
What is a price maker
Where the firm has some power to set the price they sell at
What are the objectives of firms
Profit maximisation
-May only be an objective in the long run, sacrificing profit in the short run
Growth
-maximising sales or revenue in short run (could be achieved by setting prices lower)
Alternate objectives
- use sustainable resources to protect environment
- use suppliers in their region to support local business
What are the properties of perfectly competitive markets
Where there is an infinite number of suppliers and consumers
Small enough so they have no ‘market power’
Consumers have perfect information
-every decision is well informed
Producers have perfect information
-no firm has ‘secret’ low-cost production methods
Homogeneous goods (means no branding)
No barriers to entry or exit
Firms are profit maximisers
Define homogeneous
Products are identical
This also means no brands
What does it mean when there are low barriers of entry and profits are high
New firms will enter the market
What are the properties of less competitive markets
High barriers of entry
Therefore profits and prices will stay high as new firms can’t enter the market and bring them down
What are the factors that influence the structure of markets
Product differentiation
Level of barriers of entry
Number of firms
What is a monopoly
A market containing a single seller
What is a pure monopoly
A market with a single supplier
What is monopoly power
Markets with more than 1 seller have it
Act as price makers by controlling supply to influence the goods price
What are the factors that can result in monopoly power
Barriers to entry
Advertising and product differentiation
Few competitors in the market
What can barriers of entry be used for
Maintaining and creating monopolies
What is a barrier to entry
Any obstacle thst makes it impossible or unattractive for a new firm to enter a market
What does concentration ratios show
How dominant the big firms in a market wre
What are concentrated markets
Industries dominated by just a few companies, even though there may be many firms in that industry overall
How do you calculate the concentration ratio
E.g. 3 firms control 90% of the market, while another 40 firms control the other 10%
3 firm concentration ratio = 90%
45 Mil total in market
If the firms had revenues of 15m, 9m and 7m respectively
3 firm concentration ratio = (15+9+7)/45 x100 = 68.9%
What are the potential benefits from monopolies
Gain an advantage from economies of scale
Security in the market, can have a long term view with innovation
Market is dominated by few large firms, but they still compete
What are the disadvantages of monopolies
Restrict consumer choice
Fewer incentives to innovate
No inventive to cut costs as they’re price makers
Use its powers to exploit suppliers
