production and costs

Question 1

what is production

Answer 1

production covers all those activities which provide the goods and services to satisfy wants

Question 2

structure of industry (4)

Answer 2

• primary production: raw materials
• secondary production: farming
• tertiary production: teaching
• quaternary production: research

Question 3

what is specialisation

Answer 3

Specialisation is the use of resources for that productive activity to achieve efficiency

Question 4

benefits of specialisation (3)

Answer 4

• increased productivity
• reduced unit cost of production
• efficient use of scarce resources
• increases Quality

Question 5

advantages of division of labour to workers (3)

Answer 5

• increased productivity: increased income
• skills are more easily acquired
• workers can specialise in the job that gives most satisfaction

Question 6

disadvantages of division of labour to workers (4)

Answer 6

• increased unemployment: less demand for workers
• higher risk of structural unemployment
• interdependence: everyone depends on each other so if the chain breaks it will have wide effects
• boredom of repeating tasks

Question 7

link between specialisation and exchange (4)

Answer 7

• specialisation cannot exist without exchange
• specialisation depends on a large market for each good
• specialisation can be affected by various economic changes

Question 8

mobility of factors of production (2)

Answer 8

• occupational mobility concerns the movement of a factor of production from one occupation to another
• geographical mobility describes the movement of a factor from one location to another

Question 9

short term production meaning

Answer 9

this is when at least one factor of production is fixed

Question 10

what are fixed costs (4)

Answer 10

• fixed costs do not change as production increases
• fixed costs include rent and bank interest
• fixed costs are shown on a diagram as a horizontal straight line
• if there is no output then fixed costs are the same as total costs

Question 11

what are variable costs (3)

Answer 11

• variable costs change directly with output
• variable costs include purchases of stock or raw material
• where there is no output there are no variable costs

Question 12

what is total costs

Answer 12

fixed costs + variable costs

Question 13

what are average fixed costs (3)

Answer 13

total fixed costs / output

they remain the same in the short run but when output increase they spread over a larger number of units

fixed costs fall continuously

Question 14

what are average variable costs (2)

Answer 14

total variable costs/output

it initially falls then rises

Question 15

what are average total costs (2)

Answer 15

Total costs/output

high when output is small

Question 16

what is marginal costs

Answer 16

how much total costs change when output is changed by one unit

Question 17

what is the law of diminishing returns/law of variable proportions

Answer 17

it states that if one factor of production is fixed in supply e.g. land in the short run and extra units of another factor e.g. labour are added to it then the extra output gained from the employment of each extra unit of this factor must diminish/go down as the fixed factor becomes overworked

Question 18

what is the law of diminishing marginal returns

Answer 18

as more units of a variable factor are added to fixed amounts of a fixed factor, the extra amount produced (marginal product) will at first increase then fall

it deals with short run situations

Question 19

law of increasing and diminishing returns (5)

Answer 19

• the law explains the shape of the average variable, average total and marginal cost curves in the short run only
• as more of a variable factor of production is added to a fixed factor of production then output initially increases but will eventually fall as the fixed factor is overworked
• average total costs fall due to increasing average returns and rise due to diminishing average returns
• marginal costs fall due to increasing marginal returns and rise due to diminishing marginal returns
• in the long run period there are no fixed costs

Question 20

an example of diminishing returns

Answer 20

if only one member of staff is employed in a salon with 4 booths then the number of haircuts per output will be lower than it could be as 3 booths are unused

if more staff is employed then more booths will be used and output should increase

if you continue to employee more staff there will nor be enough booths meaning staff is over supplied

Question 21

what are the short run shut down conditions (6)

Answer 21

if the price a firm charges for a product is less than the average cost of total production then they are losing money

fixed cost must be paid regardless of output

a firm will continue to produce in the short term as long as the price charged is greater than the average variable costs

staying open can ensure customer loyalty and keep workers from leaving as changes are being made

if the price is less than average variable costs the business produces zero closes

if the long run a firm must cover all costs

Question 22

what is the long run time period

Answer 22

the long run is the time period when all factors of production are variable so there are no fixed costs

Question 23

what are economies of scale

Answer 23

only occur in the long run are are the advantages of large scale production resulting in lower average unit costs

Question 24

difference between internal economies of scale and external

Answer 24

external economies of scale: advantages business gain as a result of the growth of an industry

internal economies of scale: advantages that arise as a result of the growth of a business

Question 25

external economies of scale examples (3)

Answer 25

• local knowledge and skilled labour
• training facilities
• good transportation links

Question 26

advantages of internal economies of scale (5)

Answer 26

• technical: better and more expensive machinery is available
• managerial: higher skilled staff can be employed
• financial: loans are available with lower interest rates
• purchasing: larger business often receive a discount because they are buying in bulk
• risk bearing: spreading the risk by having different products or locating in geographical areas

Question 27

diseconomies of scale (3)

Answer 27

• these occur in the long run and are the disadvantage of large scale production that result in higher unit costs
• poor communication e.g. managing staff on a large scale can become a challenge which slows down communication
• reduced motivation: staff can feel remote and unappreciated so work rate begins to fall and unit costs begin to rise

Question 28

summary of short and long run cost curves (5)

Answer 28

• the short run average curve falls due to increasing average returns to the fixed factor of production and rises due to diminishing average returns to the fixed factor of production
• short run average cost curve forms a U shape
• the short run marginal costs curve falls du to increasing marginal returns to the variable factor of production and rises due to diminishing marginal returns to the variable factor of production
• short run marginal cost curve forms a J shape curve
• the long run average costs curve falls due to economies of scale rises due to diseconomies of scale. the long run average cost curve is made up of a number of short run average cost curves

Question 29

what is labour productivity (2)

Answer 29

labour productivity is output per person in a given time period and is found by dividing total output by the number of workers

it can be an indicator of efficiency

Question 30

factors affecting productivity (4)

Answer 30

• skills and qualifications of workers
• morale of workers
• technological progress
• rules and regulations regarding workers

Question 31

what is the importance of labour productivity (4)

Answer 31

• it helps with economic growth as it allows firms to produce more for lower costs
• rising productivity keeps costs low
• if workers are more productive then firms can afford to give wage increases
• it can help boost exports and keep prices down through lower costs

Question 32

how can productivity fall (4)

Answer 32

• strikes and other industrial action
• high unemployment
• lack of skills and training amongst workers
• cheaper wages can cause businesses to employ more staff rather than use capital