Production, Costs and Revenue Flashcards
Production
Production describes the process of transforming inputs (factors of production) into outputs (finished goods), using resources/factors of production.
Productivity
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.
Productive efficiency
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.
Marginal and Average costs
MC - The cost of increasing output by one unit
AC - The mean cost per unit
AC = TC/output
AFC = TFC/output
Explicit costs
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
Implicit costs
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.
Specialisation
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.
Division of labour
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.
Economies of scale
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:
External economies of scale
Decrease average costs due to positive externalities of an industry or economy growing in size. LRAC curve will shift downwards.
Monopoly
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.
Diseconomies of scale
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.
Revenue
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.
Profit
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
Invention
The act of making new discoveries
Innovation
The act of making positive changes to something already established
Creative destruction
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.
returns to scale
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.
Minimum efficient scale (MES)
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.
Price takers
Operate in perfectly competitive markets. No pricing power and have to accept the prevailing market price
Double coincidence of wants
when two people have goods they are both happy to swap in exchange.
Total product
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.
Marginal product
The additional (extra) output as a result of employing one more worker.
AFC
= TFC/Q
