Chapter 4 : Production, costs and revenue Flashcards
What is production?
Production is the output of goods and services produced by an individual, firm or country.
What is productivity?
Productivity measures the rate of production by one or more of the factors of production.
What is labour productivity?
The output per worker.
What is the formula for productivity?
productivity = total output per period of time / number of units of factors of production
What is the formula for labour productivity?
labour productivity = total output per period of time / number of units of labour
What is the productivity gap?
The difference between labour productivity in e.g. the UK and other developed economies.
What is specialisation?
When an individual, firm, region or country produces a limited range of goods and services.
What is an example of specialisation?
A firm specialising in accountancy.
What is division of labour?
Specialisation at the level of the individual worker.
What is an example of division of labour?
One worker making pins from start to finish might make 20 pins in a day whereas ten workers doing individual tasks to make the pin might make 48000 pins in a day.
What is exchange?
When one thing is traded for another.
What is an example of exchange?
An hour of work is exchanged for a wage.
What is bartering?
The exchange of goods and services for other goods and services.
What is bartering?
The exchange of goods and services for other goods and services.
What are the benefits of specialisation and the division of labour?
Explain them.
- Increase in skill
- Increase in productivity
- Ability to use specialist machinery
- Workers are able to work to their strengths
What is the short run?
In the short run the availability of at least one of the factors of production are fixed in terms of how much a firm can use.
What is the long run?
In the long run all factors of production a firm uses can be varied they are variable.
What are fixed costs? Give an example.
Fixed costs are costs that do not vary directly with the level of output. An example is energy bills.
What are variable costs? Give an example.
Variable costs are costs that vary directly with the level of output. An example is casual wages.
What are variable costs? Give an example.
Variable costs are costs that vary directly with the level of output. An example is casual wages.
What are average fixed costs?
Costs that fall as output increases because firms are able to spread out the costs over an increasing volume of output.
What is the formula for average fixed costs?
AFC = total fixed costs / output
What are average variable costs?
Costs that initially fall in the short run but increase as there is more output and more factors of production that begin to overcrowd the fixed factors of production.
What is the formula for average variable costs?
AVC = total variable costs / output
What are total costs?
Costs that are made up of fixed and variable costs.
How do you calculate total costs?
Total fixed costs + Total variable costs
What is marginal cost?
The additional cost to a firms total costs after producing an additional unit of output.
What is the law of diminishing returns?
When an additional unit of the variable factors of production are added to a fixed factor, marginal product will decrease eventually.
Give an example of the law of diminishing returns.
- A busy kitchen restaurant
- More workers are hired
- Increase in productivity and returns
- Increase in specialisation and division of labour
- Very busy in the kitchen now
- Reduction in productivity because too many employees getting in each others way
What is returns to scale?
Shows the relationship between an increase in the quantity of firms inputs and the proportional change in output.
What is increasing returns to scale?
When an increase in the quantity of a firms inputs leads to a greater level of output.
What is decreasing returns to scale?
When an increase in the quantity of a firms inputs leads to a lower level of output.
What is constant returns to scale?
When an increase in the quantity of a firms inputs leads to an identical level of output.
What is economies of scale?
The reduction in average total costs due to firms increasing their output in the long run.
Basically output increases then ATC decreases.
What is an example of economies of scale?
Laptop prices have fallen over time because big companies like Apple produce in a large scale. This allows them to lower their average costs and they pass on these savings to consumers by charging lower prices.
What is internal economies of scale?
When a reduction in long run average total costs results from the growth of the firm.
What are the types of internal economies of scale?
Financial economies of scale, technical economies of scale, managerial economies of scale, marketing economies of scale.
What is financial economies of scale?
That the larger and more reputable a firm is the more likely banks will see them as credit worthy and loan them money as they are seen as less risky recipients of loan funds.
What is an example of financial economies of scale?
Firms will begin to bulk buy their products due to bulk buying discounts.
What is technical economies of scale?
That larger firms are able to afford specialist capitalist machinery which can lead to an increase in productivity and output.
What is an example of technical economies of scale?
Car manufacturing firms like Toyota and Volkswagen are able to afford assembly lines which can increase production and decrease average cost of production.
What is marketing economies of scale?
That larger firms tend to have huger advertising budgets.
What is an example of marketing economies of scale?
Marks and Spencer are able to advertise on TV during Christmas because they make more sales they can spread this budget over a larger output than a smaller retail.
