Production, Costs and Revenue Flashcards
Specialisation
Worker only performing one task or a narrow range of tasks. Also, different firms specialising in producing different goods or services
Division of labour
Different workers perform different tasks in the course of producing a good or service
Law of diminishing returns
A short-run law which states that as a variable factor of production is added to a fixed factor of production, eventually both the marginal returns and then the average returns begin to fall
Marginal returns of labour
The change in the quantity of total returns resulting from the employment of one or more worker, like when you employ one worker above the optimum, the average and marginal returns start to fall from the previous value.
Internal Economies and diseconomies of scale
Economies- as output increases, long-run average costs fall
Diseconomies- as output increases, long-run average costs rise
Changes incurred by a firm’s changes in its scale or size
External economies and diseconomies of scale
This however is when (economies of scale) the average unit cost of production fall, not because of the growth of the firm but due to the growth of the industry in which the firm belongs to. The same is true for diseconomies, average costs of production increase in a market.
Types of internal economies of scale
Technical- changes in production process
Managerial- more efficiency in division of labour, delegation, specialisation
Marketing- use market power to bulk buy supplies for example
Financial- large firms have ability to loan at lower interest rates
Types of Internal diseconomies of scale
Managerial- administration becomes difficult with growth
Communication failure
Motivational- over specialisation can create boredom
Examples of external economies and diseconomies of scale
Economies- when a lot of firms in the same industry are located close to each other, a cluster effect happens and they provide sources of supply and trained labour for each other
Diseconomies- cluster effects cause the firms to get in each others way like competition for labour among firms which raise local wages which in turn increases the unit production
The benefits of profit
Creation of worker incentives- use profit or performance related pay
Creation of shareholder incentives- higher dividends
Profits and resource allocation- profits by incumbent firms create incentives for new producers to enter the market
Innovation- profits as a reward create new incentive for innovation
Used as a source of business finance
Technological change
The overall effect of invention, innovation and the diffusion or spread of technology in the economy. Different changes in different firms can bring about monopolistic competition
Difference between invention and innovation
Invention is about creating new ideas for products or processes while innovation converts the results of invention into marketable products or services
Productive efficiency
Minimises wastage, when firms produce maximum output at lowest possible cost. When price=MC/ production is at the lowest point of the AC curve
Dynamic efficiency
Ability to adapt and improve its productivity over time in response to changing markets, technologies, and customer preferences. Need profits for reinvestments long-term. Shown in graphs through long run supernormal profits
Productivity gap
The difference between labour productivity between economies
Productivity
Output per unit of input, labour productivity is per worker and capital is per unit of capital
Firm
A productive organisation which sells its output of goods/services commercially
Exchange
To give something in return for something else received. Money is a medium of exchange
Mini-evaluation of specialisation
A worker will not need to switch between tasks, so time will be saved, raising total output. Workers will most likely become more efficient but it can be bad if it involves ‘de-skilling’ and the creation of boredom which may reduce production
Returns to scale
The rate by which output changes if the scale of all the factors of production is changed (only in long-run). Short run occurs when at least one factor of production is fixed
Increasing, constant, and decreasing returns to scale
When the scale of FoP increases:
Increasing- output increases at a faster rate
Constant- output increases at the same rate
Decreasing- output increases at a slower rate
Fixed costs and Variable costs
Fixed costs (short run does not change with output
Variable costs (changes with output even in short run)
A plant
An establishment, such as a factory owned and operated by a firm
Relationship between returns to scale and economies of scale
Increasing returns to scale lead to economies of scale because as output increases faster than inputs, the money cost of producing a unit of output must fall. Decreasing returns, diseconomies of scale.
