Production and costs Flashcards
What is production?
Turning raw materials into finished goods
What is productivity?
Output per unit of input used
What is labour productivity?
Output per worker, total output/no. of employees
What is capital productivity?
Output in relation to the amount of capital inputs
What is a productivity gap?
The gap between the UK output per worker and other nations- under-investment in capital and training
What are short run costs of production?
A period time in which at least one factor of production is fixed, usually land
What are long run costs of production?
A period of time where all factors of production are variable
What are fixed costs?
Costs that do not change with output but can change over time
What are variable costs?
Costs that directly alter with output
What are total costs?
Sum of all expenses from producing and selling a product
What are average fixed costs?
Fixed cost per unit, continuously declines as you produce more units.
What are average variable costs?
Variable costs can be different at different levels of output.
What is an average cost/unit cost?
Average cost of producing one unit
What is a marginal cost?
The cost of producing one more
What are economies of scale?
When average costs fall when you increase the level of output
What are internal economies of scale?
When average costs fall due to growth of the firm itself
What are purchasing economies of scale?
Bulk-buying- when you buy greater amounts of raw materials, you can negotiate discounts with suppliers resulting in your variable costs per unit falling, reduce the average cost.
What are technical economies of scale?
Larger firms can afford to invest in the most efficient an modern machinery which provides the lowest AC but smaller firms cannot afford to do this.
What are marketing economies of scale?
Advertising is a fixed cost so when you increase output the advertising cost per unit falls, reducing the average cost.
What are managerial economies of scale?
In larger businesses managers are able to specialise which improves efficiency and reduces average cost but in smaller firms managers may have to perform multiple roles which is less efficient.
What are financial economies of scale?
Businesses often grow by borrowing money as they lack the retained profit and may not ant to dilute ownership of the business. Larger firms are must credit worthy and therefore have the greatest choice of lenders and receive lower interest rates than smaller firms reducing their loan repayments, and reducing their average costs.
What are network economies of scale?
This is when the setup costs are high but the marginal costs of adding an extra user to the network is very low or even zero which provides huge economies of scale potential.
What are external economies of scale?
When average costs fall due to growth of the industry within which the business operate which brings advantages to the firms and shifts the long run average cost curve down.
Labour- external economies of scale
As an industry grows more people want to train up in it due to career opportunities so more courses are developed and taken which increases the supply of labour, reducing wage rates and reduces average costs.
Raw materials- external economies of scale
As an industry grows suppliers to it are in high demand which provides a profit motive to existing firms to expand their production and signals new firms to enter the industry which increases the supply and reduces the variable cost per unit reducing the average cost.
Industry growth- external economies of scale
As an industry grows support businesses like suppliers, transport often setup close by and the government often invests in infrastructure which increases efficiency.
What are diseconomies of scale?
When the average cost rises due to increasing output beyond a certain point, acting as a disincentive to growth further.
What are internal diseconomies of scale?
When average costs rise due to the firm itself growing beyond a certain level of output.
Types of internal diseconomies of scale?
Usually associated with loss of control and communication issues.
Growth can lead to an extra level of hierarchy and more managerial positions which need paying.
Selling further afield can increase transportation costs.
Growth can increase spans of control and mistakes/wastage can occur from overworked workers and managers can’t supervise as well, more difficult communication.
Going international can create language barriers and time zone delays.
What are external diseconomies of scale?
When the average cost rises due to excessive growth of an industry beyond a certain point.
Types of external diseconomies of scale?
Labour- it takes time for career potential to be recognised and for courses to be developed and taken do in reality the demand for labour outweighs the supply, increasing wage rates and increasing the average cost.
Suppliers/raw materials- there is a time lag and it’s not easy- it takes time for producers to react to the profit motive and for the signalling function to kick in for new producers so in reality demand outstrips supply, pushing up variable costs and increasing the average cost.
What is productive efficiency?
Producing at the lowest average cost ie. the bottom of the average cost curve and anywhere in the optimum range.
Producing anywhere on the PPF.
What is allocative efficiency?
Producing where the price equals the marginal cost to produce it. This is the best use of society’s scarce resources. If the price is greater than the marginal cost this is good for businesses by bad for consumers.
What is total revenue?
Sum of money generated from selling goods and services.
What is average revenue?
Price received on average at different levels of output.
What is profit?
Sum of money left over from revenue after subtracting costs.
