Production, Costs And Revenue

Question 1

Productivity

Answer 1

Output per unit of input

Question 2

Labour productivity

Answer 2

Output per worker

Question 3

Capital productivity

Answer 3

Output per unit of capital

Question 4

Specialisation

Answer 4

A worker performing only one or few tasks within the workplace
A firm specialises in producing a certain product

Question 5

Division of labour

Answer 5

Each worker performs a different task within a firm in the course of producing a good/service

Question 6

Benefits of DoL/specialisation

Answer 6

Workers won’t have to switch between tasks (time saving)
More + better machinery can be employed
Workers become more efficient due to ‘practice makes perfect’

Question 7

Negatives of DoL/specialisation

Answer 7

Workers can get bored which reduces motivation and therefore productivity.
Specialised firms aren’t flexible.
Specialised countries rely heavily on trade.

Question 8

Trade

Answer 8

The buying/selling of a good or service

Question 9

Exchange

Answer 9

To give something in return for something else e.g : money

Question 10

Short run

Answer 10

At least one factor of production is fixed

Question 11

Long run

Answer 11

All factors are variable

Question 12

Marginal returns of labour

Answer 12

The addition of to total output bought about by adding one more worker to the labour force

Question 13

Law of diminishing marginal returns

Answer 13

(Short term) as a variable factor of production is added to a fixed factor of production, both marginal and average returns to the variable factor will begin to fall

Question 14

Total returns

Answer 14

The whole output produced by all factors of production employed

Question 15

Average returns to labour

Answer 15

Total output ➗ number of workers

Question 16

Returns to scale

Answer 16

(Long run) The rate which output changes if the scale of all the factors of production is changed. E.g: to avoid diminishing returns to scale a firm may invest in a larger workspace to fit more workers and make space for higher output

Question 17

Increasing returns to scale

Answer 17

When the scale of all the factors of production employed increases, output increases at a faster rate

Question 18

Constant returns to scale

Answer 18

When the scale of all the factors of production employed increases, output increases at the same rate

Question 19

Decreasing returns to scale

Answer 19

When the scale of all the factors of production employed increases, output increases at a slower rate

Question 20

Total costs

Answer 20

TC = total fixed cost + total variable costs

Question 21

Average total cost

Answer 21

ATC= average fixed cost + average variable cost

Question 22

Fixed cost

Answer 22

Cost of production that doesn’t change with output (short run) e.g: rent or capital

Question 23

Variable cost

Answer 23

Cost of production that changes with the amount that is produced (short run and long run) e.g: wages or raw materials

Question 24

Average variable cost

Answer 24

AVC= total variable cost ➗ size of putput

Question 25

Marginal cost

Answer 25

MC = the addition to total cost after producing one extra unit of output

Question 26

Average fixed costs

Answer 26

AFC= total fixed cost ➗ output

Question 27

Average total cost

Answer 27

ATC = average fixed cost + average variable cost

Question 28

What do firms aim to maximise

Answer 28

Assumed profit max

Question 29

What do consumers aim to maximise

Answer 29

Assumed utility max

Question 30

Where is profit max on an ATC curve

Answer 30

Lowest point on the curve indicates highest output at lowest cost

Question 31

Economies of scale

Answer 31

As output increases, long run average cost falls

Question 32

Diseconomies of scale

Answer 32

As output increases, long run average cost rises

Question 33

Internal economies of scale

Answer 33

Technical Managerial Marketing Financial/capital raising Risk-bearing Economies of scope

Question 34

External economies of scale

Answer 34

Managerial Communication failure Motivational

Question 35

Technical economies of scale (internal)

Answer 35

Changes to the ‘productive process’ Caused by invisibilities, spreading of R&D costs, volume economies , economies of massed resources and economies of vertically linked processes

Question 36

Managerial economies of scale (internal)

Answer 36

The larger the scale of the firm, the more they will benefit from specialisation within management

Question 37

Marketing economies of scale (internal)

Answer 37

Bulk-buying to reduce costs and keep output high, large firms can use their market power to buy supplies at a lower price and/or market their products on better terms negotiated with wholesalers and retailers

Question 38

Financial economies of scale (internal)

Answer 38

Relate bulk buying to finance their businesses expansion, large firms can borrow more from banks at a lower rate

Question 39

Risk bearing economies of scale (internal)

Answer 39

Larger firms are less exposed to risks than smaller firms since they can spread the risks across the business by diversifying their goods

Question 40

Economies of scope

Answer 40

Factors that make it cheaper to produce a range of products together than search separately

Question 41

Economies of scope

Answer 41

Factors that make it cheaper to produce a range of good rather than each separately

Question 42

Managerial diseconomies of scale (external)

Answer 42

As a firm grows, control of management gets harder, personnel who lack appropriate experience can make bad decisions leading to higher costs for the firms

Question 43

Communication failure (external)

Answer 43

There may be too many layers of management within a large firm, this can lead to miscommunication and staff feeling undervalued, leading to a fall in productivity and therefore raising costs. This is not aided by problems not being effectively addressed

Question 44

Motivational diseconomies of scale (external)

Answer 44

Larger firms struggle to motivate workers, over specialisation can lead to workers getting bored and reduce their incentives to aid employers

Question 45

MES

Answer 45

MES = minimum efficient scale, the flat bottom area of an ATC curve showing how exhaustion of economies of scale not immediately leading to diseconomies of scale

Question 46

Long run marginal costs

Answer 46

The additional cost incurred if a firm increases output when all factors of production are variable

Question 47

Average revenue

Answer 47

Total revenue ➗ output

Question 48

Total revenue

Answer 48

All the money a firm earns from sales

Question 49

Marginal revenue

Answer 49

The addition to total revenue resulting in the sale of an extra unit of output Change in total revenue ➗ change in output

Question 50

On a monopoly diagram, which curves represent demand and supply

Answer 50

Average revenue = demand Marginal cost = supply

Question 51

Relationship between marginal and average revenue

Answer 51

Marginal > average, average rises Marginal < average, average falls Marginal = average, average is constant

Question 52

Conditions of perfect competition

Answer 52

Large number of buyers and sellers Low barriers to entry/exit Perfect information Price takers Homogeneous goods

Question 53

Price maker and price taker demand curves

Answer 53

Price taker curve = perfectly elastic (horizontal) Price maker curve = downward sloping

Question 54

Total Profit

Answer 54

Total revenue - total costs

Question 55

Profit maximisation

Answer 55

Firms are assumed to aim for profit max, the level of output where total profit is greatest

Question 56

Normal profits

Answer 56

Minimum profit a firm can make to stay in business

Question 57

Supernormal profits

Answer 57

Extra profit, above the normal profit. Can be used to invest in R&D Acts as a magnet for new firms to join the market due to the attraction of higher profits

Question 58

Roles of profit in a market economy

Answer 58

Creates worker incentives Creates shareholder incentives Resource allocation A reward for innovation + risk taking Source of business finance

Question 59

Invention

Answer 59

Making something new, that hasn’t existed before

Question 60

Innovation

Answer 60

Improvements on something that has already been invented

Question 61

How technological change affects economic performance

Answer 61

Methods of production Productivity Efficiency Costs of production

Question 62

Productive efficiency

Answer 62

Bottom of the ATC curve, occurs when it is impossible to produce more of one good without producing less of another

Question 63

Dynamic efficiency

Answer 63

Measures improvements in productive efficiency that occur in the long run

Question 64

Creative destruction

Answer 64

Capitalism evolving and renewing itself over time through new technologies and innovations replacing older technologies and innovations