Business Economics Flashcards
What is production?
Manufacturing a good in order to sell it
What is productivity?
The output per factor employed
What is labour productivity?
The output per worker or output per hour worked
What is specialisation?
When a person, firm or country focuses on a limited range of goods and services
What is division of labour?
A type of specialisation where production is split into different tasks and specific people are allocated to each task
What are the advantages of specialisation?
People can specialise in what they do best, which leads to better quantity and quality of goods
More efficient production
Training costs are reduced
Disadvantages of specialisation?
Workers end up doing the same thing in repetition, can result in boredom
Countries become less self-sufficient
Lack of flexibility
What is a firm?
Any sort of business organisation
What is an industry?
A place where all firms provide similar goods & services
What is the formula for profit?
Total revenues - Total costs
What is the short run?
A period of time where at least one factor of production is fixed
What is the long run?
A period of time where all factors of production are variable
What is a fixed cost?
A cost that doesn’t vary with output, it must be paid even if the firm is producing nothing
What is a variable cost?
A cost that varies with output, as output increases these costs increase
What happens to all costs in the long run?
They all become variable costs
What are total costs?
All the costs involved in producing at a particular level of output
What is the formula for total costs
Total costs = total fixed costs + total variable costs
What is average cost?
The cost per unit produced
What is the formula for average costs?
Average costs = Total costs/ Quantity
What is the formula for average fixed costs?
Average fixed cost = Total fixed cost/ quantity
What is the formula for average variable costs?
Average variable costs = Total variable costs/ quantity
What is marginal cost?
The extra cost incurred as a result of producing an additional unit of output
What are marginal costs affected by?
Variable costs
Law of diminishing returns
Economies and diseconomies of scale
Where does the lowest average cost occur?
The output level where MC equals AC
This is the productive efficiency point
What is marginal product?
The additional output produced when one more unit of a factor of production is employed, while other factors remain fixed
What happens as marginal returns rise?
Marginal product increases
Marginal cost decreases
What happens as marginal returns fall?
Marginal product decreases
Marginal cost increases
How can productivity be improved?
Investing in capital
Training workers/Specialisation
Improving management
Economies of scale
What are economies of scale?
The cost advantages that a firm experiences as it increases production, leading to a decrease in average costs per unit
What are the types of internal economies of scale?
Technical
Purchasing
Managerial
Marketing
Financial
Risk-bearing
What are internal economies of scale?
The cost savings that a firm achieves as it grows in size and increases production, lowering average cost per unit
What are external economies of scale?
The cost savings that occur due to factors outside a firm, typically within an industry or geographic area
What are diseconomies of scale?
When a firm becomes too large, leading to rising average costs as output increases
Why does diseconomies of scale occur?
Management issues
Worker alienation
Communication breakdowns
Bureaucracy
Supply chain issues
What are increasing returns to scale?
When a firm’s output increases by a greater proportion than the increase in inputs
What are constant returns to scale?
When a firm’s output increases by the same proportion than the increase in inputs
What are decreasing returns to scale?
When a firm’s inputs increases by a greater proportion than the increase in output
What are returns to scale?
The change in output resulting from a proportional change in all inputs in the long run
What is minimum efficient scale of production?
The level of output at which a firm can achieve lowest average costs
What is revenue?
The total income a firm receives from selling its goods or services
What is total revenue?
The total income a firm receives from selling a particular good or service
What is the formula for total revenue?
Price x Quantity
What is average revenue?
The revenue per unit of output
What is the formula for average revenue?
Total Revenue / Quantity
What is marginal revenue?
The additional revenue a firm earns from selling one more unit of output
What does the demand curve of a price taking firm look like?
It’s horizontal at the market price. This is because the firm cannot influence the market price. The firm can sell any quantity of output at the market price, so its demand curve is perfectly elastic at that price
What is PED when total revenue is maximised?
1
What is marginal revenue at when total revenue is at its maximum?
0
When does normal profit occur?
When a firm’s total revenue equals its total costs, including explicit and implicit costs
When does supernormal profit occur?
When a firm’s total revenue exceeds its total costs, including explicit and implicit costs
When can a firm continue to produce in the short-run?
As long as TR covers VC even if it can’t cover FC
When is profit maximised?
When MC = MR
The cost of producing one more unit of output is exactly equal to the revenue generated from that unit
What is the main objective of a firm?
To maximise profit
When does a firm revenue maximise?
When MR = 0
When does a firm sales maximise?
When MR = 0 and TR is a its peak
