MICRO 4 - Production, costs & revenue

Question 1

What is production?

Answer 1

it converts inputs such as the services of factors of production from capital and labour into final output. It satisfies consumer needs and wants

Question 2

What is productivity (labour productivity)?

Answer 2

output per worker per period of time

Question 3

How can you increase productivity?

Answer 3

• training workers
• using more advanced capital machinery

Question 4

What is the productivity gap?

Answer 4

the difference between labour productivity in different countries

Question 5

Equation for productivity:

Answer 5

total output per period / number of units of FofP

Question 6

What is specialisation?

Answer 6

when an individual worker, firm, region or country produces a limited range of goods and services

Question 7

Example of specialisation:

Answer 7

a person specialising as a tax accountant

Question 8

Advantages of specialisation:

Answer 8

• higher output & higher quality
• greater variety of goods & services
• more opportunities for economies of scale due to an increase in the market size

Question 9

Disadvantages of specialisation:

Answer 9

• work becomes repetitive, which lowers motivation of workers
• increases structural unemployment
• increased worker turnovers

Question 10

What is division of labour?

Answer 10

specialisation of production at the level of an individual worker

Question 11

Advantages of division of labour:

Answer 11

• “people do the thing they do best”
• better quality, higher quantity
• increased labour productivity
• reduced costs
• reduced training costs

Question 12

Disadvantages of division of labour:

Answer 12

• repetitive tasks means boredom
• reduced job satisfaction
• reduced productivity individually
• countries less self sufficient
• lack of flexibility in the workforce

Question 13

What are functions of money?

Answer 13

a medium of exchange

Question 14

What are the 3 functions of money?

Answer 14

• measure of value
• store of value
• deferred payments

Question 15

What are measure of value?

Answer 15

a value given to a good or service e.g. a barrel of oil

Question 16

What is a store of value?

Answer 16

an individual does not have to spend income immediately as the money has the same value in the future

Question 17

What is a deferred payment?

Answer 17

money that can be paid at a later date for something that is consumed now

Question 18

What is short run (in costs of production)?

Answer 18

a period of time where at least one factor of production is fixed, it is the maximum level of production (land or capital)

Question 19

What is a firm?

Answer 19

any business organisation

Question 20

What is an industry?

Answer 20

a group of firms providing similar goods

Question 21

What is a market?

Answer 21

all the buyers & sellers for a good or service

Question 22

What is revenue?

Answer 22

money earnt by a firm (PxQ)

Question 23

What are costs?

Answer 23

outgoings a firm incurrs from production

Question 24

What are fixed costs?

Answer 24

costs that do not vary with output in the short run

Question 25

Equation for average fixed costs:

Answer 25

total fixed costs / output

Question 26

What are variable costs?

Answer 26

production costs that vary with the level of output

Question 27

Equation for average variable costs:

Answer 27

total variable cost / output

Question 28

Equation for total costs:

Answer 28

total variable costs + total fixed costs

Question 29

What does the SRAC curve look like?

Answer 29

a nike tick

Question 30

What are sunk costs?

Answer 30

a cost that cannot be recovered if a business closes down e.g. paying for a license

Question 31

What are closing costs?

Answer 31

a cost incurred when closing a business (redundancy pay)

Question 32

What are marginal costs?

Answer 32

the extra cost incurred from producing one more unit of output

Question 33

What does the LRAC curve look like?

Answer 33

a U shape

Question 34

What is long run (in costs of production)?

Answer 34

a period of time where all factors of production are flexible

Question 35

What is the law of diminishing returns?

Answer 35

adding one more FofP to fixed capital causes marginal output to fall, then, so does average output. the next worker is not as productive and brings everyone down

Question 36

What does the marginal output curve look like?

Answer 36

an upside down nike tick

Question 37

What are returns to scale?

Answer 37

the change in output of a firm after an increase in factor inputs

Question 38

What are economies of scale?

Answer 38

the decrease in average total cost that firms experience by increasing output in the long run

Question 39

What are internal economies of scale?

Answer 39

they occur when firms become larger, average costs of production fall as output increases

Question 40

What are the 6 internal economies of scale?

Answer 40

- risk bearing - financial - managerial - technological - marketing - purchasing

Question 41

What are risk bearing internal economies of scale?

Answer 41

when a firm becomes larger they expand their production range, spreading the costs of uncertainty

Question 42

What are financial internal economies of scale?

Answer 42

banks lend loans out more cheaply to larger firms as they are deemed less risky

Question 43

What are managerial internal economies of scale?

Answer 43

larger firms are more able to specialise and divide labour, which lowers their average costs

Question 44

What are technological internal economies of scale?

Answer 44

larger firms invest in capital, which lowers their average costs

Question 45

What are marketing internal economies of scale?

Answer 45

larger firms can divide their marketing budgets across larger outputs

Question 46

What are purchasing internal economies of scale?

Answer 46

larger firms can "bulk-buy" which means each unit will cost them less

Question 47

What are external economies of scale?

Answer 47

they arise from factors outside the firm often related to the industry or business environment which firms operate

Question 48

What are diseconomies of scale?

Answer 48

a business has moved beyond their optimum size in the long run, output passes a certain point and average costs start to increase per extra unit of output produced

Question 49

Examples of external economies of scale:

Answer 49

estate agents or car dealerships

Question 50

Why do firms benefit from external economies of scale?

Answer 50

- infrastructure economies - knowledge & labour pool - supplier networks

Question 51

What is revenue?

Answer 51

money coming into a firm ("turnover")

Question 52

Equation for revenue:

Answer 52

price x quantity

Question 53

What is average revenue?

Answer 53

price (same as demand curve)

Question 54

Equation for average revenue:

Answer 54

total revenue / output

Question 55

What is marginal revenue?

Answer 55

change in revenue from selling one extra unit of output

Question 56

Equation for marginal revenue:

Answer 56

total revenue = price per unit x quantity

Question 57

What is innovation?

Answer 57

improving an existing product

Question 58

What is invention?

Answer 58

creating something brand new

Question 59

Steps of creative destruction:

Answer 59

- new idea is invented + innovated - destroys/disrupts current markets - short term unemployment - these people re-train in new industries - in the long run unemployment changes very little

Question 60

What does creative destruction do?

Answer 60

increase efficency of productive processes in an economy

Question 61

Equation for total profit:

Answer 61

total profit = total revenue - total costs

Question 62

What is normal profit?

Answer 62

the level required to reward risk (competition) e.g. petrol stations

Question 63

What is supernormal profit?

Answer 63

over and above the normal level of profit (monopolies) e.g. £2 redbull