Business economics Flashcards
Total profit calculation
Total revenue - Total costs
What is the main objective of a firm?
To make profit
How does a firm achieve more profit?
Increasing revenue or decreasing costs
How to increase revenue?
- Increase productivity
- Specialisation
- Division of labour
What are the pros of specialisation?
- Increased efficiency
- Increase expertise, no time wasted
- Less time training multiple skills
- Can solve the problem of scarcity, resources being used more efficiently, more output produced per unit of input
What are the cons of specialisation?
Workers may become bored
Total revenue calculation
Price x quantity sold
Total cost calculation
Fixed costs + variable costs
What are fixed costs + examples?
Costs that remain constant regardless of the level of output.. e.g Rent, loan repayments, fixed salary costs and marketing
What are variable costs + examples?
Costs that change with output e.g Packaging, energy and fuel costs, raw materials, commission bonuses
What is the equation for average variable costs?
Total variable costs/output
What does the fixed costs curve look like?
Flat
What does the variable costs curve look like?
45 degrees
What is the short run?
Amount of time by which at least 1 factor of production is fixed
What is the long run?
Amount of time whereby all factors can be varied
What are the 4 factors of production?
Land, labour, capital and enterprise
Equations for:
- Average cost
- Average variable cost
- Average fixed cost
- Marginal cost
- average total cost
Average cost = Total cost/output
Average variable cost = Total variable cost/output
Average fixed cost = Total fixed cost/output
Marginal cost = Change in total cost/change in output
Average total cost = average variable cost + average fixed cost
What is the marginal cost?
The cost to produce one more unit
What does the graph of AC and MC look like (draw it)?
- Costs on Y axis
- Output on X axis
- MC initially decreases then increases
- AC decreases then decreases, hitting the MC curve at the lowest AC
What are the benefits of specialisation?
- It can help with the problem of scarcity, if more resources are used efficiently, more output can be produced per unit of input
- Training costs are limited as workers are only trained to perform simple tasks
- Better quality and higher quantity of products for the same amount of effort overall - i.e. increased labour productivity
What are the disadvantages of specialisation?
- Workers can do repetitive tasks which can lead to boredom
- Countries can become less self sufficient and Over reliant. For example if a country specialises in manufacturing and imports all of its fuel, it could be in trouble if it falls out with its fuel supplier
- Lack of flexibility and can lead to structural unemployment, for example if companies move elsewhere then the workforce left behind could find it difficult to adapt
What are the 4 functions of money?
- Medium of exchange
- A measure of value
- A store of value
- A standard (or method) of deferred payment
Why does the marginal cost curve initially decrease and then begin to increase in the short run?
The law of diminishing returns, so the MC curve is always U shaped
What is the law of diminishing marginal returns?
As the level of a variable factor input is increased, marginal product (or marginal returns) will eventually begin to diminish
What is the division of labour?
The division of labour refers to the breakdown of the production process into many separate tasks
What is specialisation?
Specialisation refers to concentrating the production process on a particular good or task.
What is production?
Production involves converting FOP Inputs (e.g. Raw materials and labour) into outputs (goods to sell).
What is productivity?
Productivity is a measure of how efficient a firm is at producing it’s output and is defined as the output per unit of Input employed.
What is labour productivity?
Labour productivity is the output per worker or output per hour worked
How to improve labour productivity?
Better training
More experience
Improved technology
specialisation
What are economies of scale?
The cost advantages gained by a firm from increasing output.
What are the two categories of economies of scale?
Internal and external
What are Internal economies of scale + 5 examples?
Internal economies of scale involve changes within a firm
- Technical
- Purchasing
- Managerial
- Financial
- Risk-Bearing
What is technical economies of scale?
The purchasing of specialist capital to use in production, helping reduce average costs
What is purchasing economies of scale?
Larger firms making large quantity of goods require large quantities of raw materials (a FOP input), and so can often negotiate discounts with suppliers as larger firms are the most important customers of suppliers.
What are managerial economies of scale?
Large firms can employ specialist managers to take care of different areas of the business e.g. Finance and customer service. This is a form of division of labour, meaning specialist managers gain expertise and experience in a specific area, usually leading to better decision making abilities.
What are financial economies of scale?
Larger firms can borrow money at a lower rate of interest - Lending to them is seen as less risky
What is risk bearing economies of scale?
Larger firms can diversify into different product areas and markets lading to firms being able to take risks - If a product fails, a larger firms other activity allow it to absorb the cost of failure as it has many other revenue streams.
What are external economies of scale + examples?
External economies of scale involves changes outside a firm I.e. changes in Industries.
Examples include local colleges offering qualifications needed by big local employers + improvements in road networks.
What are diseconomies of scale?
Diseconomies of scale are the cost disadvantages that firms incur due to an increase in output and can be divided into 2 categories, Internal and external.
What are Internal diseconomies of scale?
Occurs due to changes within a firm
Wastage and loss can increase, bigger warehouses may lead to things getting lost of mislaid.
Communication may become more difficult as a firm grows (overcrowding)
What are external diseconomies of scale + examples?
Occurs due to changes within Industries
As an Industry becomes larger, the price of raw materials may increase as demand is greater.
Draw the LRAC and SRAC curves and the FC and VC curves.
Can’t add an image :sad_face:
