Production Costs and Revenues Flashcards
Describe productivity
- 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.
Describe specialisation
- 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.
Describe functions of money
- 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.
Define variable costs
- 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.
Define total costs
Total costs = Variable costs + Fixed costs
Define total costs
Total costs = Variable costs + Fixed costs
-Total costs include physical costs (variable and fixed) as well as opportunity costs.
Define total average costs
Total AVG costs = Total costs / output/quantity produced
Define marginal cost
- 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)
Describe the division of labour
- 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.
Describe characteristics of money
- Transportable
- Recognisable/Understandable
- Durable
- Used throughout an economy
Describe potential disadvantages of the division of labour/specialisation in production.
- 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.
Describe potential advantages of the division of labour in production.
- 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.
Define marginal revenue (MR)
- Marginal revenue (MR) refers to the additional revenue gained/lost by increasing output by one unit.
- MR = Change in total Revenue / Change in output
Define average revenue (AR) + explain why a firms demand curve is its Average revenue curve
- 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.
Define total revenue (TR)
TR = Output * Price per unit sold
When does a firm maximise total revenue
- 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.
Define profit
-Profit is the difference between Total revenue and total costs.
Define normal profit
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
Describe roles of profit in a market economy
- 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.
Describe how technological change can alter the structure of markets.
- 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.
Describe how technological change can alter the methods of production
- 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)
Describe financial economies of scale
- 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.
Define diseconomies of scale + examples
- 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.
Describe marketing economies of scale
-As output grows the price of marketing/advertising per unit decreases therefore an overall reduction in costs.
Describe marketing economies of scale
-As output grows the price of marketing/advertising per unit decreases therefore an overall reduction in costs.
Describe purchasing economies of scale
- 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.
Describe managerial economies of scale
-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.
Describe external economies of scale
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.
Define returns to scale
- 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.
Describe creative destruction
- 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
List potential business objectives
- Profit max
- Revenue max
- Maximising customer outreach
- Moral objectives/environmental
- Quality
- Good labour standards
- Non-profit
- Reward shareholders
Describe profit maximisation of a firm
- 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.
Describe sales maximisation of a firm
- 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
Describe revenue maximisation of a firm
- 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.
Describe corporate social responsibility
-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.
Describe the principal agent problem
- 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).
Describe satificing
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.
