Production, Costs and Revenue Flashcards
GO OVER THIS TOPIC BEFORE THE EXAM!
What is meant by a Diseconomy of scale?
A diseconomy of scale is an increase in long run average costs as output increases due to decreased efficiency
What are the major diseconomies of scale?
- Control
- Coordination
- Communication
- Motivation
How is Control a diseconomy of scale?
As business size increases, it becomes harder and more stressful to control the growing workforce, leading to a reduction in productivity
How is Communication a diseconomy of scale
As a business grows it becomes harder to communicate messages around the business resulting in an increased cost
How is coordination a diseconomy of scale?
As a business grows, it becomes harder for departments to coordinate with eachother
How is motivation a diseconomy of scale?
As the business grows, employees may feel less valued, resulting in lower motivation and reduced labour productivity
what is meant by the term revenue
Revenue can be defined as the total sales of the business
How do we calculate revenue
Price x Quantity sold
How do we calculate average revenue
Price x quantity/ quantity
ANSWER: JUST PRICE
How do we calculate marginal revenue?
Change in total revenue/ change in quantity
What is meant by marginal revenue?
The additional revenue generated by selling one more unit of product
What is meant by “the law of diminishing marginal returns”?
- Increasing the number of FOPs increases productivity, decreasing unit costs as fixed costs are spread over a larger output.
- Each additional FOP will have less value
Adding more FOPs after a certain point may cause inefficiencies - Inneficiencies reduce productivity, thus reducing outputand increasing unit costs
What is an economy of scope?
When producing two or more goods together results in a lower marginal cost that producing them apart
What is the minimum efficient scale?
The minimum efficient scaleis when output and average costs are at their lowest.
What is meant by the term “Returns to scale”
Returns to scale refers to how a firms output changes and its inputs are increased or decreased
What are the sections of the long run average cost curve
Economies of scale
Productive efficiency
Diseconomies of scale
What return to scale do EOS have?
Increasing returns to scale
What is meant by increasing returns to scale?
More output per unit of input
What type of return to scale is there at productive efficiency
Constant returns to scale- inputs=outputs
What type of return to scale is there at DEOS
Decreasing returns to scale- less output per unit input
What happens to average costs when inputs=outputs
Average cost stays the same
What happens to costs when inputs>Outputs
Average cost increases
What happens to costs when outputs> inputs
Average cost falls
What happens to FOPs in the short run
There is atleast one fixed FOP
