Production, Costs and revenue

Question 1

Production

Answer 1

the total output of goods and services produced by an individual or firm

Question 2

how is production the process of factor conversion

Answer 2

Because it converts inputs into goods/services

Question 3

How is production influenced by the state of the economy

Answer 3

During a recession, production falls. During a boom period, production increases.

Question 4

Productivity

Answer 4

a measure of efficiency that calculates the amount of outputs produced power unit of input. How efficiently resources are being used.

Question 5

why is higher productivity important to a firm

Answer 5

• lowers cost & improves competitiveness
• produces more output with same input so generates increased economies of scale
• firms can generate higher profit
• ability of int’l comp markets will generate economic growth

Question 6

Specialisation

Answer 6

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

Question 7

What are the different levels of specialisation

Answer 7

• an Individual level
• business level
• regional level
• global level: countries trading (Bangladesh specialise in textiles and exports to world)

Question 8

What did Adam smith say about division of labour

Answer 8

That without specialisation one worker making pins might make 20 pins per day, while ten workers specialising in the individual tasks might be able to ask 48,000 pins per day

Question 9

Division of Labour

Answer 9

When tasks is broken up into several components tasks, so workers specialists by focusing on one or a few components which results in higher output

Question 10

What does specialisation lead to

Answer 10

• Repitition
• Experience
• Fewer mistakes
• Productivity increases

Question 11

Importance of exchange

Answer 11

specialisation and division of labour are only viable is an efficient system of exchange exists.
So when one thing is traded for something else

Question 12

Short run

Answer 12

When there is at least one fixed factor of production
(Land and capital equipment)

Question 13

Long run

Answer 13

When all factors of production are variable

Question 14

What are the two groups of costs

Answer 14

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

Question 15

What are the two types of explicit costs

Answer 15

• 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 16

What is the AFC formula

Answer 16

TFC/ output

Question 17

Why does average fixed costs fall as output increases

Answer 17

Because the firm is able to spread the fixed costs over and increasing volum

Question 18

What happens to fixed costs as output rises

Answer 18

stays the same

Question 19

Examples of fixed costs

Answer 19

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

Question 20

Examples of variable costs

Answer 20

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

Question 21

The Law of Diminishing Returns

Answer 21

In the short run, as a variable is added to a fixed factor of production(labour) marginal utility will initially rise then fall.

Question 22

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

Answer 22

• 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 23

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

Answer 23

• 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 24

Total cost

Answer 24

total variable cost plus total fixed costs

Question 26

Explain the Total Cost Curve

Answer 26

- 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 27

Marginal cost

Answer 27

The additional cost of producing an extra unit

Question 28

Formula for marginal cost

Answer 28

Change in TC / Change in output

Question 29

Is productivity increases, what happens to marginal cost

Answer 29

It will decrease, because if productivity increases workers will produce things more quickly with fewer errors

Question 30

Why does MC decrease then increase

Answer 30

MC will initially decrease because as output increases and more workers are hired they can specialise, increasing productivity and decrease MC But MC would then increase because diminishing marginal returns will decrease productivity, increasing marginal cost.

Question 31

Economies of scale

Answer 31

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

Question 32

Diseconomies of scale

Answer 32

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

Question 33

Explain the Long Run Average Costs curve

Answer 33

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 34

What does the minimum efficient scale point mean

Answer 34

- 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 35

Internal economies of scale

Answer 35

- 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 36

External economies of scale

Answer 36

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 37

What happens when a firm is too big

Answer 37

- 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 38

Total revenue

Answer 38

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

Question 39

Average revenue

Answer 39

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

Question 40

What is profit

Answer 40

- The difference between total revenue and total costs.

Question 41

What is normal profit

Answer 41

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

Question 42

What is supernormal profit?

Answer 42

- when TR > TC

Question 43

What is subnormal profit

Answer 43

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