Production Costs And Revenue Flashcards
Production
Total output of goods/services that a country or firm produces
Productivity
A measurement of the rate of production by one or more factors of production
Total output per period of time/ number of units of factor of production
Output per unit of input over a given time period
Costs
Fixed
Do not vary directly with output in the short run
Rents
Building insurance
Salaries of senior staff
Variable costs
Those that vary directly eh the level of output
Raw materials
Packaging
Wages of causal staff
Types of cost
Total costs- total fixed+total varied
Average total costs- total costs/output
Marginal cost- the addition to a firms costs from employing one more unit of labour
Costs of production in the long run
Returns to scale- the relationship between increases in the quantity of a firms inputs and the proportional change in output
Economies of scale
Average revenue
Total revenue- price x QTY demanded
Average revenue= total revenue/ quantity
Marginal revenue- change in total revenue/change in output
Why is AR the demand curve
Average revenue shows the quantity demanded at each price, which means that the AR curve can be said to be the demand curve
For perfect comp- the characteristics of the market make demand perfectly elastic- at the ruling market price the firm can sell all the units of output it can produce-this constant price means that AR and MR are constant
For a pure monopoly it’s demand curve is basically for the whole market
Downward sloping as it agrees with laws of demand- has to decrease price to increase QD
Profit
Total revenue-costs
Normal profit- the minimum amount required to reward the entrepreneur for the risk he took and to keep him in business
Supernormal profit- profit over and above normal profits.
Technological change
Invention-the creation of a product or process
Innovation- new products and production processes that are developed into marketable goods/services
Creative destruction- where technological change leads to the development of new “disruptive products” which render existing products obsolete
E.g. Internet based firms have used disruptive technology to undermine the monopoly powers of existing firms (amazon)
Diseconomies of scale
Where output increase and so do average costs
May arise from
Control- monitoring the productivity and quality of thousands of workers in big complex corporations is imperfect and expensive (principal agent problem- difficulties of shareholders monitoring the performance of managers
Co-ordination- can be complicated to coordinate complex production processes across several plants
Achieving large flows of information is expensive in large businesses
Cooperation- if workers do not feel to be an integral part of the business,their productivity may fall leading to ways he of factor inputs and higher costs
How to avoid diseconomies of scale
Human Resource management
Performance related pay schemes
Out sourcing
Effects of diseconomies of scale
Means that
Business has moved beyond their optimum size
Businesses are suffering from productive inefficiency
Higher unit costs will reduce total profits
Businesses may then have to charge higher prices
Lost competitiveness could lead to declining market share and also a fall in their share price
