Production, Costs and Revenue Flashcards
What is labour productivity?
Output per worker per time period
What is specialisation?
Where an individual, firm, region or economy vconcentrates on a narrow range of task, producing excess for individual needs and then trading the excess for those goods and services which they no longer produce.
What is division of labour?
linked to specialisation and is where a firm decides whether to break down the job of making a complex product in to a number of simpler, constituent parts such that individual workers are sable to specialise and become more of an expert in their particular task.
What are the benefits of the division of labour?
Workers are able to quickly gain a high level of skill in a limted range of tasks.
Workers can specialise in areas which they enjoy or are expert
Time-savings as workers don’t need to use multiple different tools
Reduces the level of capital investment requires as tools requires to do a specific task are only given to the worker with that specific task./
What are the gains you can get from specialisation?
Higher output per unit of input
Quality improvements due to expertise in terms of the product, delivery times or customer service
lower cost per nit- greater competitiveness due to lower prices and higher profit margins.
What are some of the problems with specialisation?
Tasks can become tedious and monotonous.
Workers may end up feeling that they cant be bothered which may result in lower quality and higher levels of absenteeism.
The market may not be large enough to sustain high levels of specialisation.
If one area becomes too specialised then should a particular industry decline then workers can be left with no work-structural unemployment.
What is likely to happen if money is used as a medium of exchange?
trade is likely to increase.
Specialisation and the division of labour require what?
A means of exchanging goods and services.
What is the production process?
Concerned with transforming a large range of outputs into those outputs that are required for the market.
What does adding value involve?
Making a product more desirable to a consumer so that they will pay more for it that it cost to make.
What is productivity?
A measure of the efficiency of a factor input that measure how much a factor input can produce per time period.
How is productivity calculated?
Total output(per time period)/ number of units of input.
What is labour productivity?
How many units are worker can produce in a given period of time.
What are the other types of productivty?
Capital productivity= total output/ number of machines
Land productivity= total output/ number of units of land
What does an increase in the productivity of one factor do to overall productivity/
Increase it
What can an increase in one factor input also mean?
An increase in another factor’s productivity. e.g. machines making workers more productive.
How could you boost productivity other than specialisation and division of labour/
Working in teams
Investment in better training
Investment in better capital
Motivating reward structures
Performance related bonuses
Why is increasing productivity important?
More output from the same or less inputs= lower average costs
lower average costs= higher profits, or lower prices
lower prices= greater competitiveness locally and/or even internationally.
What are fixed costs?
Costs which do not change with output e.g. insurance, rent, business rates (can change with time)
What are variable costs?
Costs which change with output- the more that is made th ehigher the costs ill be e.g. raw materials components, energy.
How do you calculate total costs?
Fixed Costs + Variable Costs = TOTAL COSTS
How do you calculate average or unit costs?
total costs/ output
Why is the AC curve u-shaped?
Initially AC will fall as the firm produces more goods up to the point Y. This is because it is using its inputs more efficiently.
After point Y, AC will rise as inputs start to lose efficiency.
If average costs are reduced (economies of scale) what can firms do?
Either
- make higher profit per unit sold
OR
-lower prices (maintaining profit per unit) and become more price competitive.
Why is the AFC (average fixed cost) curve always falling?
Falling at an increasingly slower rate because costs will decrease with higher output as cost per unit has decreased.
Why does the AVC (average variable cost) curve have a lower turning point than the AC curve?
AC turning point higher than AVC turning point because increasing AVC must be higher than AFC before AC can rise.
What is average revenue?
The average value of receipts from selling a unit of output.
How is average revenue calculated?
Total revenue/ quantity sold
What is total revenue?
The total amount of money recieved from the scale of a given quantity of output.
How is total revenue calculated?
selling price per unit x quantity sold
What is profit?
Total revenue - total costs
Where does productive efficiency occur?
At the lowest point on the average cost curve where AC is minimised.
When an economy is producing on the PPF curve.
What are economies of scale?
The fall in Long Run Average Costs of Production as the scale of the firm increases.
(+ the advantages which a firm gets from being big)
What is the definition of the short run?
The period of time during which at least ONE factor input to the production process is fixed.
What is the definition of the long run?
The period of time during which ALL factor inputs to the production process are variable.
When do managerial economies of scale occur?
When companies can afford specialists who can more effectively manage particular parts of the business.
What are the advantages of a managerial economy of scale?
Specialised staff and leaders can innovate, inspire, cut costs and give firms direction.
This should increase quality and lower costs per unit.
When does a technical economy of scale occur?
When a firm is able to use its machinery and equipment more efficiently and spread its fixed costs as it grows in size
What are the advantages of a technical economy of scale?
Using larger capacity machinery which reduces average costs.
Bigger firms use all of their equipment all the time meaning they are more efficient than small firms who can’t use it all of the time.
R&D costs can be spread over a larger number of units (e.g. car development)
When does a purchasing/marketing economy of scale occur?
Larger businesses can afford to bulk buy
larger businesses can afford more advertising campaigns etc.
What are the advantages of a purchasing/marketing economy of scale?
Make profit through volume.
Higher volumes leads to discounts- if a discount is not offered to larger companies they will seek a competitor.
Total marketing costs are spread out over a larger amount of output leading to lower costs per unit.
What is a risk bearing economy of scale?
When companies operate globally in order to spread their risk against recessions etc.
When does a financial economy of scale occur/
When larger firms are able to borrow larger sums of money, and are more likely to be lent to as they are less risky than smaller firms.
What are the advantages of a financial economy of scale?
The larger amount of money you borrow and the lower the risk, the lower the rate of interest you will pay.
Lower cost per £1 borrowed.
What are diseconomies of scale?
When a firm gets to a scale where they are impossible to manage efficiently leading to rising average cost per unit.
Why do diseconomies of scale arise?
Workers feel alienated
Communication becomes slow and efficient
Decision making becomes slow and efficient.
What is the definition of external economies of scale?
Economies of scale, represented by a downward shift of the average cost curve, which arise from a growth in the size of the industry in which the firm operates.
What are some examples of external economies of scale?
Improved local infrastructure
Pool of locally available skilled labour
Plentiful supply of locally based support services
Government assistance for large industry that is not available for a small industry (e.g. for export contracts)
What will external economies of scale have on the LRAC (long-run average cost) curve?
They will cause the LRAC curve to shift downwards
What is the primary source of external diseconomies of scale?
Where a growing industry, competing for the available factors of production, causes the price of factor inputs to rise - (demand exceeds supply).
What effect will external diseconomies of scale have on the LRAC curve?
They with cause the LRAC curve to shift upwards.
What is the short run?
the period of time over which at least 1 factor input is fixed.
What is the long run?
the period of time over which all factor inputs are variable.
What is does the law of diminishing returns state?
if increasing quantities of a variable input are combined with a fixed input, eventually marginal and then average output (product) of that variable input will decline. Diminishing returns are said to exist when this decline occurs.
When do increasing returns to scale exist?
if the percentage increase in output is greater than the percentage increase in all factor inputs.
When do constant returns to scale exist?
if the percentage increase in output is equal to the percentage increase in all factor inputs.
When do decreasing returns to scale exist?
exist if the percentage increase in output is less than the percentage increase in all factor inputs.
What is marginal output (product)?
the addition to total output from 1 more unit of variable input.
What is average output?
the average amount of output from each unit of variable input.
What is marginal cost?
The addition to total cost of producing one extra unit of output
What is average cost?
The average cost of production per unit, calculated by dividing the total cost by the level of output
What is imputed cost?
An economic cost that the firm does not pay for with money but which is the opportunity cost of the use of a factor of production
What is economic cost?
The opportunity cost of an input to the production process
What is total cost?
The overall cost of producing a given level of output, calculated by adding total fixed cost and total variable cost together
What is minimum efficient scale of production?
The lowest level of output at which long run average cost is minimised
What are semi-variable costs?
Costs that can be both fixed and variable in nature depending on the circumstances
What is the optimal level of production?
The range of output over which long run average costs are lowest
How are average and marginal cost curves related?
They are mirror images of each other. e.g. as average and marginal product curves rise, average and marginal cost curves fall at the same rate and vice-versa.
What does the law of diminishing returns determine the shape of ?
The average and marginal product and (short run) cost curves
What determines the shape of the LRAC curve?
Returns to scale.
What factors could cause a shift in the LRAC curve?
External economies and diseconomies of scale
Taxation/subsidies
Improvements in technology
Explain the Perfect Competition revenue diagram
TR curve of the firm is upward sloping at a constant rate as each unit is sold at the same price.
AR and MR will therefore be the same for each unit sold and the associated AR and MR curves will be the same line; horizontal at the ruling market price. (perfectly elastic)
The AR curve will also be the demand curve that the individual firm faces because it reflects the price the consumer is willing to pay for any given quantity of output. (which is the demand curve)
Why can a firm in perfect competition sell as many units as it likes without affecting the mkt ruling price?
in perfect competition, each individual firm is assumed to be SO SMALL in relation to total mkt supply that any extra units of output they supply has no effective impact on the overall mkt supply (the mkt supply curve will not shift to the right) and hence no impact on ruling mkt price.
Why is a firm in perfect competition a price taker?
The assumption of perfect competition is that products in the market are identical. Therefore an individual firm in perfect competition cannot sell at a higher price than the ruling mkt price because no rational consumer would be willing to pay a higher price when they could get exactly the same product cheaper from another supplier.
Likewise no individual firm would sell at a lower price than the ruling mkt price because they are profit maximisers and can already sell as many units as they like at the ruling mkt price. Hence they have no incentive to sell at a lower price
Explain the revenue diagram for imperfect competition
The TR curve will rise at first and then fall. It will start to fall at the point where the MR becomes negative.
The associated AR and MR curves are downward sloping reflecting the fact that the firm has to lower its price in order to gain an extra unit of sales.
The AR curve will also be the demand curve that the individual firm faces because it reflects the price the consumer is willing to pay for any given quantity of output. (which is the demand curve)
Why does a firm in imperfect competition have to reduce price to sell extra units?
This is because each firm in imperfect competition is assumed to be large in relation to the market and therefore, when a firm in imperfect competition supplies extra units, it is assumed to be big enough to shift the mkt supply curve to the right, reducing the ruling mkt price.
Therefore a firm in imperfect competition has to lower its price to sell extra units because their demand curve approximates to the mkt demand curve which is downward sloping, reflecting the fact that, due to diminishing marginal utility, consumers will only buy the extra units if the price falls.
Explain what determines the shape of the TR curve?
PED
When the firm can sell as many units as it likes at the ruling market price, PED is perfectly elastic (horizontal AR and MR curves), hence an upward sloping TR curve at a constant rate.
Why is the TR curve a normal curve?
As the firm reduces price, PED is elastic, TR rises (positive MR) However as PED becomes inelastic, TR starts to fall (negative MR), hence a normal shaped TR curve.
Mathematically, why to MR fall faster than AR?
At the mid point of the AR curve, the value of PED becomes 1.
Up to this point, elastic PED means that falling price has been increasing TR. Hence MR must be positive.
After this point, PED is inelastic. Falling price reduces TR. Hence MR must now be negative.
As a result MR must become negative (cut the x axis) when AR is half way down its length. To do this MR must fall at twice the rate of AR.
What is the criteria for revenue max?
MR=0
What is the criteria for normal profit?
AR=AC
(TR=TC)
What is the criteria for supernormal profit?
(TR>TC) AR>AC
What is supernormal profit?
This is a level of profit over and above normal profit. (the minimum required to keep the firm in the industry)
The existence of supernormal profit will act as an incentive to encourage new firms to enter the industry.
What is the criteria for subnormal profit?
(TR<TC) AR<AC
What occurs for businesses as a result of subnormal profits?
Firms making subnormal profit (losses) will stay in the industry in the short run as long as they cover their variable costs of production.
These firms will leave the industry in the long run. (Subnormal profit (losses) means the firm could make higher profits if their resources were employed in the next best alternative)
Where does short run profit maximisation occur?
Where MR=MC
(always calculated as a level of output)
or the level of output where the gao between TR and TC is greatest
Why will firms shut down in the SR is they fail to cover their variable costs?
When a firm produces no output, its loss will be the value of fixed costs.
If a firm cannot even cover its variable costs of production from each unit it sells, then it will lose more money by producing output than if it shut down. In this case they are better off not to produce any output.
