Production, Costs and Revenue

Question 1

Production

Answer 1

Production describes the process of transforming inputs (factors of production) into outputs (finished goods), using resources/factors of production.

Question 2

Productivity

Answer 2

Labour productivity measures the output per worker in a period of time.
If productivity rises, firms can produce more with the same number of workers. This enables
Higher wages for workers
Increased output for the economy
A reduction in costs. A firm can produce the same quantity with fewer workers, leading to lower average costs. This can lead to lower prices or at least keep prices low.

Question 3

Productive efficiency

Answer 3

Productive efficiency is a situation where firms seek the best combination of inputs to lower their costs of production. Occurs when production is on the PPF.

Question 4

Marginal and Average costs

Answer 4

MC - The cost of increasing output by one unit
AC - The mean cost per unit
AC = TC/output
AFC = TFC/output

Question 5

Explicit costs

Answer 5

Fixed costs - A fixed cost is a business cost that is unrelated to output. Have to be paid no matter the sales achieved. The higher the FC the higher the level of output needed to break-even.
Variable costs - is a corporate expense that changes in proportion to how much a company produces or sells. Increase in SR output will cause TVC to rise. Avr VC = TVC/Q.TVC = Q X variable cost per unit of output

Question 6

Implicit costs

Answer 6

any cost that has already occurred but not necessarily shown or reported as a separate expense. It represents an opportunity cost that arises when a company uses internal resources toward a project without any explicit compensation for the utilization of resources.

Question 7

Specialisation

Answer 7

Specialisation occurs when workers are assigned specific tasks within a production process. Workers will require less training to be an efficient worker. Therefore this will lead to an increase in labour productivity and firms will be able to benefit from economies of scale (lower average costs with increased output) and increased efficiency.

Question 8

Division of labour

Answer 8

Division of labour is an economic concept which states that dividing the production process into different stages enables workers to focus on specific tasks. If workers can concentrate on one small aspect of production, this increases overall efficiency – so long as there are sufficient volume and quantity produced.

Question 9

Economies of scale

Answer 9

Economies of scale occur when increasing output leads to lower long-run average costs. It means that as firms increase in size, they become more efficient. The unit cost advantages from expanding the scale of production in the long run. Economies of scale exist when long run average costs fall as output rises. There are different types:
- Technical: Big firms can buy and use in larger dimensions and use stuff more often.
- Marketing: Advertising costs per unit will be lower. TV adverts etc can cover a larger range of products.
- Managerial: Greater specialization should result in greater efficiency. Large firm has resources to hire specialist workers to run specific functions for the business.
- Financial: Large firm have little risk attached for banks so they’re more likely to lend
- Network:

Question 10

External economies of scale

Answer 10

Decrease average costs due to positive externalities of an industry or economy growing in size. LRAC curve will shift downwards.

Question 11

Monopoly

Answer 11

A monopoly is defined as a single seller or producer that excludes competition from providing the same product. A monopoly can dictate price changes and creates barriers for competitors to enter the marketplace.

Question 12

Diseconomies of scale

Answer 12

The phenomenon that occurs when a firm experiences increasing marginal costs per additional unit of output. It is the opposite of economies of scale. Increases in the average cost of supply in the long run due to decreasing returns to scale.

Question 13

Revenue

Answer 13

Money received by a company through sales.
TR = Q x P OR AR x Q
AR = TR/Q
Maximum TR occurs where MR=0, no more added revenue can be achieved from producing and then selling an extra unit of output.

Question 14

Profit

Answer 14

Economic profit is money earned after taking explicit and implicit costs into account. Accounting profit is the net income for a company or revenue minus expenses. You can determine economic profit by subtracting total costs from a company or investment’s total revenue or return.
Profit = total revenue - total costs
Supernormal profit = TR > TC
Subnormal profit = TC >TR
Profit max = P=MC

Question 15

Invention

Answer 15

The act of making new discoveries

Question 16

Innovation

Answer 16

The act of making positive changes to something already established

Question 17

Creative destruction

Answer 17

Creative destruction is a concept introduced by economist Joseph Schumpeter that refers to the process of innovation and technological change that leads to the destruction of existing economic structures, such as industries, firms, and jobs.

Question 18

returns to scale

Answer 18

in LR all factors of production are variable. How the output of a business responds to change in inputs is called returns to scale.
Increasing Returns to Scale is when the output increases by a greater proportion than the increase in input.
Decreasing returns to scale is when all production variables are increased by a certain percentage resulting in a less-than-proportional increase in output.

Question 19

Minimum efficient scale (MES)

Answer 19

The scale of production where all of the internal economies of scale have been fully exploited. Corresponds to the lowest level of output at which the lowest point on a firms LRAC curve is reached.

Question 20

Price takers

Answer 20

Operate in perfectly competitive markets. No pricing power and have to accept the prevailing market price

Question 21

Double coincidence of wants

Answer 21

when two people have goods they are both happy to swap in exchange.

Question 22

Total product

Answer 22

It refers to the total amount of output that a firm produces within a given period, utilising given inputs. Total Product Formula is. TP= AP*L. Where AP= product/ labour unit; L= Labour.

Question 23

Marginal product

Answer 23

The additional (extra) output as a result of employing one more worker.

Question 24

AFC

Answer 24

= TFC/Q

Question 25

AVC

Answer 25

= TVC/Q

Question 26

Relationship btwn MC and AC curves

Answer 26

When the AC declines, the MC is less than the AC

Question 27

Relationship btwn MC and TC curves

Answer 27

MC is the addition to the total cost when one more unit of output is produced. When TC rises at a diminishing rate, MC declines. As the rate of TC stops diminishing, MC is at its minimum point.

Question 28

MP and MC

Answer 28

There is an inverse relationship. Both curves shapes are determined by the law of diminishing marginal returns.

Question 29

Law of diminishing marginal returns

Answer 29

The law of diminishing marginal returns states that employing an additional factor of production will eventually cause a relatively smaller increase in output. This occurs only in the short run when at least one factor of production is fixed (e.g. capital) and so increasing a variable factor (e.g. labour) will result in the extra workers getting in each other’s way, reducing productivity.

Question 29

Marginal cost

Answer 29

(Change in total cost)/(change in quantity)