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
A firm solely increases its scale and 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
Scope- cheaper to produce a range of products together than each alone
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 it’s impossible to produce more of one good without producing less of another. For a firm this is when average total costs of production are minimised
Dynamic efficiency
Measures improvements in productive efficiency that occur in the long run over time
