Production Costs and Revenues

Question 1

Describe productivity

Answer 1

• Productivity refers to the output per unit labour/worker over a specific period of time.
• An improvement in productivity refers to increasing output using the same amount of resources/labour.
• Being more productive leads to long term lower AC’s.

Question 2

Describe specialisation

Answer 2

• Specialisation is the process of assigning specific tasks/process in a production process to different workers.
• As the worker now has less to focus on, in theory will become specialised and more efficient in the specific task they have been allocated.
• Higher output per unit labour (increase in productivity) in theory will lead to a fall in average unit costs.

Question 3

Describe functions of money

Answer 3

• Medium of exchange, allows the trade of goods and services to be more fluid and efficient. Eliminates the need for a barter system/double coincidence of wants.
• Store of value, the intrinsic value of money must be stable over time, however the amount of goods/services that can be bought with money varies due to changes in prices due to market forces.
• Method of deferred payment, debt can be created.
• Unit of account, can be used to measure the real value of specific goods and services.

Question 4

Define variable costs

Answer 4

• Variable costs are costs that change dependent on output. Changes to a firms output will alter a firms variable cost.
• Eg) Resources/raw materials, commission per unit sold.

Question 5

Define total costs

Answer 5

Total costs = Variable costs + Fixed costs

Question 6

Define total costs

Answer 6

Total costs = Variable costs + Fixed costs

-Total costs include physical costs (variable and fixed) as well as opportunity costs.

Question 7

Define total average costs

Answer 7

Total AVG costs = Total costs / output/quantity produced

Question 8

Define marginal cost

Answer 8

• The marginal cost of production refers to the additional cost of producing an additional unit of output.
• The law of marginal diminishing returns states that after a specific point, marginal cost rises as output rises (workers in a resturant)

Question 9

Describe the division of labour

Answer 9

• The division of labour is the process of breaking down a production process into a range of specific individual tasks.
• Division of labour can lead to an increase in the output per person (over a specific time)/productivity as workers become proficient/specialised to this task (specialisation in production).
• DOL –> lower average unit costs –> lower prices for consumers/higher profit margins for firms.
• Eg) Car manufacturing, individual manufacturing of parts.

Question 10

Describe characteristics of money

Answer 10

• Transportable
• Recognisable/Understandable
• Durable
• Used throughout an economy

Question 11

Describe potential disadvantages of the division of labour/specialisation in production.

Answer 11

• Repetitiveness of a process may lead to lower productivity/ lack of motivation. Potential diseconomies of scale as productivity of labour may reduce.
• Lack of motivation may lead to a potential reduction in quality of work/good.
• Potentially limit the skill set of the labour force as they.’re trained and specialised to specific tasks/processes (structural unemployment).
• In businesses dealing with physical assembly lines, a halting in one section may have a knock on effect of others.

Question 12

Describe potential advantages of the division of labour in production.

Answer 12

• Increase in productivity/output per worker therefore a reduction in average unit costs.
• Competition due to specialisation may lead to further attempts to reduce costs, lower prices for consumers.
• As each worker has a specific task may lead to an increase in the quality of a good/service.
• Firms can take advantage of EOS, potential higher profits which can be reinvested.

Question 13

Define marginal revenue (MR)

Answer 13

• Marginal revenue (MR) refers to the additional revenue gained/lost by increasing output by one unit.
• MR = Change in total Revenue / Change in output

Question 14

Define average revenue (AR) + explain why a firms demand curve is its Average revenue curve

Answer 14

• AR = Total Revenue / Output
• Average revenue refers to the average price per unit.
• AR is the price per unit at any given output therefore represents a firm’s demand curve.

Question 15

Define total revenue (TR)

Answer 15

TR = Output * Price per unit sold

Question 16

When does a firm maximise total revenue

Answer 16

• When MR = 0
• When the additional revenue gained by increasing output by one unit is 0. As any further increase in output past this point will result in a negative MR therefore a fall in total revenue.

Question 17

Define profit

Answer 17

-Profit is the difference between Total revenue and total costs.

Question 18

Define normal profit

Answer 18

Normal profit refers to the minimum amount of profit that a firm needs to earn in order to stay in business. Normal profit takes into account potential opportunity costs.
-Occurs when TC = TR

Question 19

Describe roles of profit in a market economy

Answer 19

• Profit is the reward for the risk taken on starting a business.
• Profit incentivises firms to invent/innovate to reduce production costs and improve quality of goods to maximise profits.
• Profit can be used to attract investors and pay shareholders dividends.
• Profit can be retains within a firm and used to fund capital investments.
• Without profit some markets would cease to exist.

Question 20

Describe how technological change can alter the structure of markets.

Answer 20

• Nature of businesses may alter, from physical store locations –> online businesses/e-commerce.
• In monopolistic markets due to lack of competition, monopolistic firms have no incentives to develop technology to reduce costs and become more productive (inefficient).
• In oligopolies, competition incentivises firms to develop new products/technologies to aid production/reduce costs as well as develop better quality goods to become more competitive and gain higher market share.
• Internet allows for lower barriers to entry in certain markets (online retailing) this encourages competition.

Question 21

Describe how technological change can alter the methods of production

Answer 21

• Internet can be utilised to advertise and access consumers easier.
• Technological change can lead to firms becoming more efficient and productive through the use of technologically developed capital which can produce a higher output using the same amount of resources/time.
• Technological change may lead to the development of better quality goods for consumers.
• Access to international online services to outsource business through the use of the internet.
• Human labour replaced by capital/technology (online contract lawyers/data analysis algorithms)

Question 22

Describe financial economies of scale

Answer 22

• As a firm grows more likely yo have better access/relationships with banks therefore cheaper loans (lower interest rates) can be negotiated.
• Cheaper loans results in a fall in total costs.

Question 23

Define diseconomies of scale + examples

Answer 23

• The increase in average unit costs as output rises.
• Potential cost disadvantage a firm may experience due to their size.
• EG)Lack of communication between managers, emotional conflicts within business and difficult to coordinate all workers as firm grows.

Question 24

Describe marketing economies of scale

Answer 24

-As output grows the price of marketing/advertising per unit decreases therefore an overall reduction in costs.

Question 25

Describe marketing economies of scale

Answer 25

-As output grows the price of marketing/advertising per unit decreases therefore an overall reduction in costs.

Question 26

Describe purchasing economies of scale

Answer 26

• As firms grow they have greater buying power when it comes to the purchasing of natural resources therefore can negotiate better deals with suppliers and get cheaper resources.
• Ability to bulk buy to reduce the average unit cost of supplies.

Question 27

Describe managerial economies of scale

Answer 27

-Larger firms can take advantage of specialisation and the division of labour as well as hire specialist managers/employees which will further reduce average costs.

Question 28

Describe external economies of scale

Answer 28

External economies of scale are external factors that reduce the average unit costs of a firm within an industry.

• EG) Increase in training/education facilities, firms will have to train employees less as well as employees being more productive.
• EG) Improvement in transport system may reduce transport costs (fuel)
• EG)Competitive resource market, lower prices for resources.

Question 29

Define returns to scale

Answer 29

• Returns to scale refers to changes to output as a result of a change in an input factor.
• Increasing returns to scale occur when the increase in output is proportionally larger than the increase in input.
• Decreasing returns to scale occurs when the change to the input factor is proportionally larger than the change to output.
• Constant returns occur when output changes proportionally to the input factor.

Question 30

Describe creative destruction

Answer 30

• Creative destruction refers to the effects of how developing technologies and innovation lead to the potential creation and destruction of markets.
• Refers to the process of old production methods being replaced/made way for newer production methods and technology. Dismantlement of previous production methods to make way for newer improved methods of production.
• May lead to job loss/creation, structural unemployment.
• EG) Internet, leccy vechicles, netflix

Question 31

List potential business objectives

Answer 31

• Profit max
• Revenue max
• Maximising customer outreach
• Moral objectives/environmental
• Quality
• Good labour standards
• Non-profit
• Reward shareholders

Question 32

Describe profit maximisation of a firm

Answer 32

• Profit maximisation occurs when the marginal cost of producing an additional unit of output is equal to the marginal revenue gained by producing another unit of output.
• Occurs when MC = MR
• Firms aim for profit maximisation to use profits to reinvest into RND, increase shareholder dividends, attract investors.

Question 33

Describe sales maximisation of a firm

Answer 33

• Sales maximisation of a firm may be an objective of a firm aiming to increase market share/attract new customer.
• Sales maximisation occurs when average revenue equals the average cost of producing a good/service.
• Sales maximisation is producing the highest amount of output possible whilst also remaining in business and earning normal profit.
• Occurs when AC = AR

Question 34

Describe revenue maximisation of a firm

Answer 34

• Revenue maximisation occurs when the marginal revenue of producing a good/service is zero as going beyond this point would lead to no change in revenue or potentially a decrease in revenue as MR is negative.
• Occurs when MR = 0
• Firms may revenue maximise to increase customer base and increase market share.

Question 35

Describe corporate social responsibility

Answer 35

-Firms who aim to for corporate social responsibility are firms who conduct business in a manor which aims to benefit society/employees whilst also having the potential of making supernormal profit.
Examples)
-Paying workers above equilibrium wage.
-Supporting local/smaller suppliers
-Reducing discrimination
-Environmental objectives such as NET 0.

Question 36

Describe the principal agent problem

Answer 36

• The principal agent problem occurs in a business when the interests of agents within a business do not directly align with the shareholders, therefore causing conflicting/unaligned interests.
• May lead to inefficiencies and business objectives not being met.
• Combatted by attempting to align shareholder and firms agent interests (stock compensation packages).

Question 37

Describe satificing

Answer 37

Satisfying occurs in a business when employees do not achieve an optimal or best possible solution instead settle for a potentially mediocre/average solution due to the fact employees are not incentivised.
-Satisfying is essentially employees completing the bare minimum without facing noticeable consequences from senior employees.