Business Economics Flashcards
What is Labor Productivity?
Labor Productivity refers to the amount of output produced by each worker at a particular time range.
20 workers made a total of 2,000 units of output in 2 hours. Calculate the labor productivity.
Since labor productivity is the amount of output made by each worker on average, you can divide 2,000 by 20 to get 100 output produced by each worker in the 2 hour time frame.
All other things being equal, which one of the following situations always results in a rise in labor productivity?
A - Output falls at a slower rate than the fall in the number of workers employed
B - Output falls at a faster rate than the fall in the number of workers employed
C - output rises at a slower rate than the rise in the number of workers employed
D - Output always rises as the number of workers employed increases.
A.
Going through each scenario:
D -> incorrect because labor productivity is staying constant - each worker isn’t going to be producing more if there are more workers as output rises.
C -> incorrect because more workers dealing with a lower output decreases labor productivity (the amount of output made by each worker) as each worker doesn’t have to make as much if there are more of them.
B -> incorrect because ultimately, again, there are more workers dealing with a lower output which decreases labor productivity as each worker doesn’t have to make as much if there are more of them.
A -> correct because there is more output for less workers than the other 3 scenarios so workers are forced to work harder (you can assume this due to the word ‘output’) therefore more output is being made by each worker.
Describe two things that can improve labor productivity.
Better training - this may mean each worker is able to produce more at once if they are better at it (as a result of training), increasing labor productivity.
Improved technology - improved technology can speed up the rate of production so workers may be able to make products at a faster rate, meaning that each worker is able to make more products on average, increasing labor productivity
Specialization - this refers to when workers are assembled to work on only one of many tasks in the production process. Since workers are repeating the task over and over again they are likely to become considerably better at it, increasing labor productivity on average as goods are assembled/created quicker.
Describe specialization and the division of labor.
The division of labor is a type of specialization where production is split into different tasks and specific people are allocated to each task, e.g. in making a stool - one person could make the legs and another could make the seats.
Adam Smith explained the increase in productivity that could be achieved through the division of labor. He said that one untrained worker wouldn’t even make 20 pins per day, but 10 workers, specializing in different tasks, could make 40,000.
It’s not just workers who specialize, whole firms and even whole countries have specialized to an extent.
What are the advantages and disadvantages of specialization?
Advantages:
People can specialize in the thing/task they are best at, meaning that they will concentrate all of their time on that thing/task, which can lead to better quality and a higher quantity of products for the same amount of effort overall - i.e. increased labor productivity.
Specialization leads to more efficient production which helps to tackle the problem of scarcity because if resources are used more efficiently, more output can be produced per unit of input.
Training costs are reduced if workers are only trained to perform specific tasks.
Disadvantages:
Workers can end up doing repetitive tasks, which can lead to boredom.
This is a big issue, as this means that specialization can lead to a higher turnover rate. The rate of turnover refers to the rate at which employees are leaving, having to be replaced.
As well as this, boredom usually leads to a lack of motivation which decreases the productivity of the workers, leading to lower labor productivity overall.
Countries can become less self-sufficient - this can be a problem if trade is disrupted for whatever reason, like a war. For example, if a country specializes in manufacturing, and imports all its fuel (which mean it doesn’t produce it, it gets it from somewhere else), then that country could be in trouble if it falls out with its fuel supplier. This means countries are more reliant on trade and often can’t function entirely by themselves.
Money in trade is essential.
List two features of money that makes it desirable when it comes to trade.
Money is a medium of exchange - it’s something both buyers and sellers value and that means that countries can buy goods, even if sellers don’t want the things that the buying country produces.
Money is a measure of value - e.g. the value given to a good (such as a barrel of oil) can be measured in US dollars - this makes the cost of goods or services based on quantitative terms so individuals know how much to pay for a specific thing.
Money is also a method of deferred payment - money can be paid at a later date for something that’s consumed now, e.g. people often borrow money to buy a car or pay university fees.
What is a medium of exchange?
A Medium of exchange is a term in economics referring to any item that is widely acceptable when being used in exchange for goods and services.
What is a firm?
A firm is any sort of business organization, like a family-run factory, a dental practice or a supermarket chain.
What is an industry?
An industry refers to all the firms providing similar goods and services.
What is a market?
A market contains all the firms supplying a particular good or service and the firms or people buying it.
What is the formula for profit?
Total revenue - Total cost
What is the short run?
The short run is the period of time when at least one of a firm’s factors of production are fixed.
Describe why the short run of capital in a large steel manufacturer is generally longer than a small store.
if a steel manufacturer has a fixed capital, it will have to expand which is very expensive and is often long - several years, including the fact advanced technology will have to be assembled as well in order to make it work.
Small stores, however, can solve the factor of production being fixed much faster as extensions of the store will be much shorter and won’t need the assembling of advanced technology like a steel manufacturer. This means it can last only a month or two.
What is the long run?
The long run is the period of time when all factors of production can be varied.
What are fixed costs?
Fixed costs are the costs associated with the firm that don’t vary with output.
What are variable costs?
Variable costs are the costs associated with the firm that varies with output, generally increasing as output increases.
Give an example of something that would incur fixed costs.
Rent
Rent does not increase as you increase sales.
Give an example of something that would incur variable costs.
Raw materials
More output may mean more raw materials, which cost more.
Give the formula for Total Cost.
TC + TFC + TVC
Total Cost + Total Fixed Cost + Total Variable Cost
What is Average Cost (AC)?
Average Cost refers to the cost associated with each unit produced.
It is also known as Average Total Cost (ATC).
How do you calculate Average Cost (AC)?
AC = TC / Q
How do you calculate Average Fixed Cost (AFC)?
AFC = TFC / Q
How do you calculate Average Variable Cost (AVC)?
AVC = TVC / Q
How can you calculate MC?
Change in TC / Change in Quantity
Quantity went from 5 to 10.
TC went from 50 to 120.
Calculate MC.
60 / 5 = 12
What is Marginal Cost?
Marginal Cost (MC) refers to the extra cost associated with the production of the last unit of a good.
Draw a graph showing the relationship between AC and MC in the short run.
If you’re looking to be extra, draw AFC!
Describe what is shown in the graph (only do the curves that you drew).
Firstly, when MC is lower than AC, AC will be falling and this is because each extra unit produced will decrease the average cost (adding something smaller than the average will decrease the average).
After more output is added, eventually MC will be at the optimal capacity limit - the firm is producing at the quantity of goods wherein each unit of output is being produced at the lowest cost possible.
However, if more output becomes added, MC becomes to increase in the short run due to the law of marginal diminishing returns.
So, as MC increases, it eventually surpasses AC in costs - when MC is over AC, AC starts to rise. The point where MC and AC meet is the point of productive efficiency, as AC = MC.
AFC initially is high as here is a low amount of output to divide the cost by but as there is more output, AFC decreases as AFC does not change in response to changes in output and more output means that AFC is divided by more units of output decreasing the average fixed cost.
What is marginal product?
Marginal Product (MP) is the additional output produced by adding one more unit of a factor input.
What is a factor input?
Factor input refers to the addition of one of the four factors of production.
Show a graph that shows MP in the law of diminishing returns in the short run.
Label the following:
X and Y axis
Point of diminishing returns
Describe what happens in various parts of the graph.
https://media.discordapp.net/attachments/352951793187029005/821112568437276672/unknown.png?width=604&height=563
Initially, as you add more of a factor of production, the marginal product will increase - each unit of output added will add more output than the one before.
This might happen because more specialization is possible with more of a particular factor.
Eventually, if you keep adding units of one factor of production, the other fixed factors will begin to limit the additional output you get, and the marginal product will begin to fall. E.g. if a clothes manufacturer only has 5 sewing machines, employing a 6th machinist will probably add less output than employing the 5th did, and employing a 7th will add even less.
The point of diminishing returns refers to when MP starts to decrease - as factor input increases.
Eventually, MP goes under the graph which can occur if you add too much of a factor input - this is known as negative returns and it occurs because, for example, adding a 50th worker with only 5 machines to work one may start to do more harm and good as everyone gets in each others way and therefore each additional worker actually decreases your output.
What is the law of diminishing returns?
The law of diminishing returns says that if one variable factor of production is increased while the others stay fixed, eventually the marginal returns from the variable factor will begin to decrease.
Draw a graph showing the relation between MP and MC in the short run.
Describe and explain what is seen in the graph.
https://media.discordapp.net/attachments/352951793187029005/821113328164274212/unknown.png?width=676&height=564
As marginal product rises, marginal cost falls.
As marginal product falls, marginal cost rise.
Marginal cost will fall at a certain time period due to the fact that if you’re getting more additional output from each unit of input, then the cost per unit of that output will be greater.
Marginal cost will rise due to the fact that if you’re getting less additional output from each unit of input, then the cost per unit of that output will be greater.
