Production, Costs And Revenue Flashcards
Specialisation
Conc by an individual, firm, market or country on a particular product or task
Benefits of agglamationition
Groupss or firms producing complementary gods to locate near one another
Division of labour
Occurs where production is roken down into manys eperate tasks
Increasing output/person- become proficient throggh constant repition- learning by doing
Growth in productivity , decrase supply cost/unit
Lower prices- gains econ welfare
Fixed costs
Business expense that doesnt vary directl6y with level of output
Higher fc- higher output needed to bring down
Examples- rental cots, fixed salery, insurance
Distrussted amobng labbour output
Variable costs
Costs that change as output changes
Increase sr output, causes increase total vairbbale cost
Eg - wage costs, raw materials, apckagig
Av fixed cost
Total cost over output
Marginal cost
Change in total cost/change in output
Law of diminishing returns
If ne factor of production- eg land- is increasing whilst anohter factor is fixed- the production of the variabel will eventually decrease
Occurs when marginal product of labour starts to fall
Total output will be icreasing ata a decreasing rate
Short rn
At least 9one factor of production is fixed
Usually this is capital
Length of sr varies bby indsutry
Long run
All factors of production are variabble and the sacle of production can also change allowing the firms to benefit from economies of scale
Productivity
Output/unit of input
Labbour productivity
Output/worker
Capital productivity
Output/unit of capital
Prooductivity gap
Diff bbetween labbour productivity in the uk and other developed economies
Examples of productivity gap
Early 1990s and 2999s- rover car group struggle to survive in th euk carindustry- rover unabbbel to compete with japanese nissan who had high labbbour productiv9ity compared to rover- invested n state of art factory in sunderland
Key adv specialisation
Higher labbbour productivity and bbbusiness profits
Learning bby doing- increases output/hour
Increase productivity decreases unit output of supplu
Increase productive- inscrease profits
Specialisation createssurplus output traded internationaly
Comparative adv
B. Bbusiness/country specialise in own sphere
Lower pirces, increases real income, decrease prices, increase purchasing power, increased productiion increases wages
Disadv specialisation
Unrewarding repetitive work requiring lower skill, lower motivation and productivity
Workers lwess pride in work
Disatisfieed worker, rate of abbsenteeism increases
Increase worker turnover due to bboring jobb
Structural unemployment/occupational imomobbility- little training
Mass productivon standardised goods loses variety for consumers
Factors affecting labbour productivity
Advances in production technology
Investment in apprenticeships.training to lower labour structure
Specialisation within ba bbbusiness
Higher bbusiness investment as new capital improves
Q of manufacturing in a bbusiness
Highe quanity national infrasturcture- inc transport
Key functions of money
Medium of excange
Store of value
Unit of account
Standard of deferred oayment
Medium of exchange
Moneyy. Allows g and s to be raded without need for a barter sustem- rely on doubble coincidence of vbalues bbetween two people involved in an economy
Store of value
Only assest whose ‘value’ can be used now or in the future
Peeople can choose to save or spend
Unit of account
Value of items can be compared
Allows value to be expressed
Standard of deferrral payment
Value of a debbbt
Borrow today, pay back later in a time acceptabble to the person who made the loan
Economies of scale
Unit cost adv from expanding the scale of production in the lr
Decrease ac pver rnage of output, decrease av cots as business expand
Thee lower costs represent imporvemebt in productive efficieny and give a business a competitive advantage in a market- lower prices and increase dprofits
As long as lr av cost curve is declining inyernal economies of scale are being exploited
U shaped- as decrease unit costs fall as output increased- econ of scale
After productive effciiney point- unit costs increase as ooutput exceeds point, disecon of scale, decreasing retrns to scales
Internal ecn of scale
Expansion of firm itself, increasing returns from large scale production,
Technical ,managerial, finacial, risk bearing, netwrok
Internal econ of scale
Expansion of firm itself, increasing returns from large scale production, Technical ‚managerial, finacial, risk bearing, netwrok
Technical econ
Can afford more specilaist equipment and technology
Containerizion- increase vol container same cost one driver
Monopsony power
1 buyer ie tesco buys all of oen farmer gs
Purchasing econ
Bulk buying
Monopsony power- 1 buyer from a supplier
Managerial economies
Employong specialised staff to raise efficieny eg marketing accountancy
Financial economies
Lower interest rates on loans for larger firms
Less risk for larger forims
Risk bearing economies
Diff products if one fails spreads risk
Network econ
Networks if suppliers/customers - lower marginal cost of additional users
Ie netflix doesnt cost much to add anotehr user
Lrac
Long run av cost curve
Envelope curve- made up lots of sr cost curves
Diminishing returns so buy more capitala
Assumes infinate noo plant sizes and businesses choose least costly method of prodcution in lr
Minimum efficient scale (mes)
Scale of output where internal econ of scale have been fully exploited
Eg small businesses
Econ of scale, downwards sloping, platea constant returns to scale then up disecon of scale
Scope may reach mes
Low mes
Limited internal scale economies contestable market
Natural monopoly
High mes high barriers to contestability
Extensive internal econ of scale
Ie water and scarce returns
External econ of scale
Expansion of industry in which aim is merger
Arise from growth of an industry
Rapid growth in inovaing
Shifts curve left
Examples of external econ of scale
Transport netwroks- decrease logistics cost
Relocation of suppliers- to centre of production
Agglomeration economics- benefits of reduced production costs as business in similar industries clsoer together eg estate agents lawyers accountants in london, attracts ppol of labour, access complementary gand s
Economies of scope
Cheaper to prodcue a range of products rather than specialize in a limited number
Eg hypermarkets amaxon
Can sell under company brands, chanell logistics- p&g/gilette merger
Cost saving from product diversification
Causes of disecon of scale
Control and communications- problem monitor productivity and owrk quality- risk increasing wastage of resources increase cost but not to total output
Cooperatoion- workers in large firms may feel sense of alienation and loss of morale
Negative efects of internal politics- information overload, unrealistic expectaations aonmng managers, cuktue clash between senior peopel with inflated egos
More regulation and scrutiny by gov as grow bigger increases costs by regulation
Too much underutilised capital
Diseocn of scale lead to
Business moved past optimum size
Buisnesses suffering from productive inefficiency
Higher unit costs will decrease total profits
Businesses may have to charge higher prices in order to counter their increased costs
Lost competitiveness could lead to decrease market share, decreased fall share price
Eval econ of scale
All businesses can exploit some econ of sclae
Nature of production technology requirements will influence size of mes relative to market demand
Many econ depend on businesses achieving high rate of capacity utilisatino- lower fized cost/unit
Small businesses can thrive and prosper even in markets dominated by scaled businesses, trhough differentation-better customer service [
Revenue
Income generated from the sale of gs in a market
Money comingnto firm-
Turnover
Av revenue
Price per unit
Total revenue/output
Marginal rev
Change in rev from selling one extra uinit of output
Change in total rev/change in output
Total rev
Price per unit x q
Ped and rev
Ped always diagonal straight line
Highest price reduction in price will have elastic rpice- lower pirces causes rev to increase
Demand to rpice inelastic towards bottom demand curve- fall in price causes total rev to change
Slope of total rev curve- differenaion of total rev
Slope of marginal rev curve- half as steep as av rev curve- cuts x acis halway
Normal profit
Firm making enough profits to cover its cost
Opp cost of staying in business, equivalent to profit that could have been earned by next best business alternative
Supernormal profits
Any excess over normal profits
In a perfectly competitive market with no barriers to entry supernormal onlyl cocyr in sr
Creative destruction
Technological innovation replace existing market, only those innovative survive
Schumpter
Features of different markets
No of producers
Conc ratio- percentage of market top x no firms have
Barriers to entry
Product differentation
Homogenous-products same, hetergnous- goods that are diff and have larger q
Price taker/maker- determines the ability to charge eth eprice of a good
Importance of profit
Finance for capital investment and randd throgh retained profits
Market entry increase supernormal profits send signials other producers withon a market
Demand for and flow of factor resourves- resources flower where risk
Signals about health of econ- increased profits may reflect imporvements in supply side perfomrance, result in higher level ad, econ recovery
Factors affecting profitability
Degree market competition- if more comp then tend towards normal profits, monopoly wit hbarriers to entry supernormal profits made in lt
Rate of growth of market demand0 profitability squeexed in recession,decrease demandm business lessprices power
Ped potential to use price discrimination to icnrease profits- charge diff prices diff people
Changes cost factors- variable/fixed, impact gov regulators, subsidies
Shut down point
When firm no longer covers variable costs (vairable cost curve above d=ar=mr) o
Can survive for a bit if can pay some fixed cost
Productivity gap
Diff between labour productivity eg in uk and other developed economies
Exchange
To give something in return for something else recieved
Money is a medium of exchange
Plant
An establishment, such as a factory, a workshop or retail outlet, owned and poperated by a firm
Increasing returns to scale
When the scale of all the factors of production employwed increases , output increases at a faster rate
Decreasing returns to scale
When th scale of all factors of production employed increases, output increases at a slower rate
Internal disecon of scale
Mangerial disecon of scale- admin of firm more diff as firm grows in size, delegation to lower staff mean may be unskilled
Communication failure- too many layers of management, reducing staff productivity
Motivational disecon of scale- overspecialisation perform repetitive broing tasks and have little incentive to use personal initiative in ways which help their employer
Quantity setter
When a firm faces a downward sloping demand curve for its product, it possesses the market power to set the q of the good it wishes to sell
Invention
Making something entirely new, something that did not exist at all before
Innovation
Imporves on or makes a significant contribuution to something that has already been invented thereby turning the results of invention into a product
Example of creative destruction
Effective mobile phone cameras mean that kodak struggle to find niche in new market as no longer want digital camera or camera film
Iphhone creatively destoryed
Blackberry and nokia
Artificial barriers
Strategic barriers
Man made barriers to market entry
Patents, product differentiation, high levels of expendaitre on advertising and marketing, benefitting from first mover adv, limit pricing and predatory pricing
X efficiency
Firm sucessfully eliminates all unnecessary costs of production it might otherwise have incurred
Product differentiation benefit to consumer
Economist lancaster
The number of differentiated products increases until the gain to consumers in choice from adding one more products to the market exactly equals the loss resulting from having to pridce less of the existing products at a higher cost
Market conduct
The pricing and marketing polcies persued by firms
Market behavoir but not confdused with market performance which refers to teh end results of these policies
Price war
Occurs when rival firms continuously lower prices to undercut each other
Adv oligopoly
Firms benefit from economic of scale in oligopoly which means they can becomoe mroe dynamically efficient and can pass on cost cust as low prices to consumers
With only a few firms available from which best to buy it will be easy for consumers to compare and choose the best option for their needs, other markets may give too much choice, confusion- behavoural econ
Provided degree of comp, oligopolists continuoously innovate and develop new and better products
Disadv oligopoly
Restrict output and raise prices comp to more comp market, may satisfice
Cartels- raise prices, productive and allocative inefficiency and lack fo choice
Small comp and innovative firms may find it difficult to to entert he market
Producer rather than consumer wins
Deadweight loss
The loss of econ welfare when the max attainable level of total welfare fails to be achieved
The demand curve is derived form the
Av rev
The upward trend of the lrac beyond a certain scale of production reflects the fact thta beyond thsi point
Disecon of scale exceed econ of scale
Diff between sr and lr costs
There are no fixed costs in the lr but are in sr
The law of diminishing returns will only apply in situations where
There is atleast one fixed factor of production
Returns to scale concept
The output of a business responds to any chaneg in factor inputs
Division of labour requires an efficient means of exchange because
Specialist workers are not self sufficient
Productivity is a measure of
Output per unit of input
Law of diminishing marginal utility
As more of a product is consumed, extra satisfaction will decline
