Production, Costs and revenue

Question 1

Specialisation

Answer 1

When country, firm or individual focus production on one small range of products

Question 2

What does specialisation lead to

Answer 2

• Repitition
• Experience
• Fewer mistakes
• Productivity increases

Question 3

Short run

Answer 3

When there is at least one fixed factor of production

Question 4

Long run

Answer 4

When all factors of production are variable

Question 5

What are the two groups of costs

Answer 5

• Explicit costs - require actual payment
• Implicit costs - opportunity cost

Question 6

What are the two types of explicit costs

Answer 6

• Fixed costs - do not vary with output ( even if nothing is being produced firm still has to pay)
• Variable costs - vary with output (you pay more as you produce more)

Question 7

Examples of fixed costs

Answer 7

• Rent
• Salaries
• Interest
• Loans
• Advertising
• Business rates

Question 8

Examples of variable costs

Answer 8

• Wages
• Utility bills
• Raw material costs
• Transport costs

Question 9

The Law of Diminishing Returns

Answer 9

In the short run, as a variable is added to a fixed factor of production token total/marginal utility will initially rise then fall.

Question 10

What happens to Total product (terms of MP) in the Law of Diminishing returns

Answer 10

• Total product is maximised when MP=0
• As when MP is negative, TP is falling.
• And as MP is positive, then there is more output so TP is increasing.
• SO TP is only maximised when there is no MP left.

Question 11

What happens in the marginal cost curve in the Law of Diminishing returns

Answer 11

• As labour productivity rises, marginal cost is falling.
• At the point of diminishing return, marginal costs starts to rise as labour productivity falls
• Labour productivity falls due to fixed factors of production

Question 12

Explain the Total Cost Curve

Answer 12

• Total Fixed cost is CONSTANT
• Initially output is increasing quickly so VC song increase that quick
• When we hit the point of diminishing return, output falls so VC increases quicker
• Total cost is going to look exactly like VC curve but but starts from the TFC line

Question 13

Economies of scale

Answer 13

As long run average cost decreases, there’s an increase in output

Question 14

Diseconomies of scale

Answer 14

As long run average cost increases, there’s a increase in output

Question 15

Explain the Long Run Average Costs curve

Answer 15

During economies of scale:
- There’s increasing returns
- Rise in output > rise in input
- LRAC is decreasing
During Constant returns to scale:
- Rise in output = rise in input
- LRAC is constant
During diseconomies of scale
- Decreasing returns
- Rise in output < rise in input
- LRAC is increasing

Question 16

What does the minimum efficient scale point mean

Answer 16

• Lowest level of output required to exploit full economies of scale (where LRAC stops decreasing) where after that point there’s no more economies of scale and only constant returns to scale.

Question 17

Internal economies of scale

Answer 17

• Occurs within a business (total cost increases)
• Risk-bearing - larger firms sell ore product, risk can be spread across more units.
• Financial - larger firms can borrow more money at cheaper rates of interest, cost rising, quant rising.
• Managerial - larger firms increase specialisation, productivity rises.
• Technical - larger firms benefit better machinery, boost productivity.
• Marketing - larger firms sell more products, ads costs &
• Purchasing - larger firms, buy raw materials in bulk, wider range of output

Question 18

External economies of scale

Answer 18

Occurs outside the business but in
industry ( total costs decreases)
- Better transport & infrastructure - govt may provide transport and build new roads to sell goods & make raw materials accessible
-

Question 19

What happens when a firm is too big

Answer 19

• They suffer diseconomies of scale
• Total cost rising faster than quantity
  Can cause:
• Lack of Control - becomes difficult to control workforce as too many workers, so they slack off, impacting of productivity.
• lack of communication - harder to pass information through company, takes time and impacts on productivity, increasing TC.
• Lack of coordination - becomes difficult for different departments to coordinate.
• Lack of motivation - more workers , so each individual feels less valued so decreases motivation and productivity.

Question 20

Total revenue

Answer 20

Total income received by the firm from sales.
TR= Price x quantity

Question 21

Average revenue

Answer 21

Income received from sale of one unit of product.
AR= total revenue / quantity

Question 22

What is profit

Answer 22

• The difference between total revenue and total costs.

Question 23

What is normal profit

Answer 23

• when TR=TC
• the minimum profit required for firm to remain in the market.
• equal to opportunity costs

Question 24

What is supernormal profit?

Answer 24

• when TR > TC

Question 25

What is subnormal profit

Answer 25

• This is when a firm makes a loss.
• When TR < TC