Production, Costs and Revenues Flashcards
1
Q
what is the measure for productivity ?
A
output per worker
2
Q
what is the formulae for productivity ?
A
output/ number of workers
3
Q
how to increase productivity ?
A
training workers
using more advanced technology/ machinery
4
Q
what is specialization ?
A
each worker has a specific task in the production process
5
Q
what did Adam Smith famously discovered ?
A
that when division of labor was used, productivity increased
6
Q
what are the advantages of specialization & division of labor ?
A
- higher output
- higher quality
- greater variety of goods
- economies of scale, lower costs
- more competition, leading to lower prices
- higher profits
7
Q
what are the disadvantages of specialization & division of labor ?
A
- repetitive, lower motivation of workers, negatively effects quality & productivity
- higher workforce turnover
8
Q
what is the short run definition in terms of FOP ?
A
at least one FOP is fixed
9
Q
what is the long run definition in terms of FOP ?
A
all FOP are variable
10
Q
why is the SRAC and LRAS curve shaped the way it is ?
A
- diminishing returns
- at one point increasing output will be less productive, MC starts to increase
11
Q
why is the LRAC curve shaped like a U ?
A
. initially AC falls when firms take advantage of Economies of Scale
12
Q
when do internal economies of scale occur ?
A
when a firm grows
13
Q
why do internal economies of scale occur when a firm grows ?
A
because AC fall as production increases
14
Q
what is the mnemonic for internal economies of scale ?
A
“Really Fun Mums Try Making Pies”
15
Q
what does “Really Fun Mums Try Making Pies” stand for ?
A
Risk bearing
Financial
Managerial
Technological
Marketing
Purchasing
16
Q
what is the risk bearing, internal E of S ?
A
firms expand their product range, to spread cost of uncertainty
17
Q
what is the financial, internal E of S ?
A
banks are willing to lend money cheaply to bigger and growing companies
18
Q
what is the managerial, internal E of S ?
A
larger firms are able to employ specialist managers who operate more efficiently, lowering AC
19
Q
what is the technological, internal E of S ?
A
able to invest in better technology
20
Q
what is the marketing, internal E of S ?
A
greater marketing budget
21
Q
what is the purchasing, internal E of S ?
A
greater purchasing power, greater budget and influence on suppliers due to reputation
22
Q
where do external economies of scale occur ?
A
within an industry
23
Q
what is an example of external economies of scale ?
A
improving local roads, reduces transportation costs for firms/ businesses
24
Q
which type of firms have a downward sloping curve, exactly like demand curve ?
A
price taker firms (perfectly competitive markets)
25
what is AR equal to ?
demand
26
what are private costs ?
cost of production for firms
27
what are social costs ?
private costs + external costs
28
what is supply equal to ?
S = MPC+ MSC
29
what are private benefits ?
satisfaction consumers get from consuming a good or service
30
what are social benefits ?
private benefits + external benefits
31
what is demand equal to ?
MPB + MSB
32
what is allocative efficiency ?
maximization of society surplus, both consumer and producers wants and needs are met
33
what is the equation for allocative efficiency ?
MC = AR
34
what is productive efficiency ?
maximum production at the lowest possible cost
35
what is the equation for productive efficiency ?
MC = AC
36
what is the equation for profit maximization ?
MC = MR
37
what is the equation for a normal profit ?
AC = AR
38
what is the equation for revenue maximization, and why ?
MR = 0 , because when MR is positive, total revenue is increasing, and when MR is negative total revenue is decreasing
39
the factors of production are combined in such a way as to ... ?
minimise the costs and maximise the sales revenue
40
what is the definition of production ?
the act of adding value to the factors of production to create goods and services
41
during a recession what happens to production ?
it falls
42
during a boom what happens to production ?
it increases
43
what is productivity a measure of ?
how efficiently resources are being used in the creation of goods and services
44
how does higher productivity benefit a firm & the economy ?
- lower costs, improving a firms/ economy to compete
- produce more output
- generate higher profits
- higher wages
- higher gov revenue from corporation tax
45
what is division of labour ?
when the production process is broken up into several component tasks
46
in the short run ... ?
at least one factor of production is fixed
47
in the long run ... ?
all factors of production are variable
firms plan to increase capacity and production in this stage
48
what is the law of diminishing marginal returns ?
the point at which adding additional units of labour, decreases productivity
(due to overcrowding, more variable FOP -labour- than fixed FOP - machinery-)
49
what are fixed costs ?
costs that do not change as level of output changes
50
what are variable costs ?
costs that do vary as level of output changes
51
what are short run costs ?
some factors of production are fixed costs
52
what are long run costs ?
all factors of production are able to be variable costs
53
what is the formula for average total cost ?
fixed cost ?
variable cost ?
total cost/ quantity
fixed cost/ quantity
variable cost/ quantity
54
on a cost curve diagram where do MC intersect AC ?
at its lowest point
55
what starts to begin when the MC curve starts to increase ?
diminishing marginal returns
56
on the cost curve diagram what are the labels for the axis ?
Y = cost, rev, price
X = quantity
57
what are factor inputs ?
the factors that are considered in production of goods/ services
i.e. raw materials, wages etc
58
what are the two types of factor inputs ?
capital-intensive
labour-intensive
59
the more expensive the factor inputs ... ?
the more expensive cost of production
60
the cheaper the factor inputs ... ?
the cheaper the cost of production
61
what are capital intensive factor inputs ?
machinery based factor inputs
62
what do economies scale enable business to do ?
lower their AC of production
63
how do firms generate increasing returns to scale in the long run ?
economies of scale
64
what are on the axis of the economies of scale LRAC curve ?
Y = average cost
X = quantity of output
65
At some level of output, a firm will not be able to reduce costs any further, what is that point called ?
productive efficiency (maximum output, at the lowest cost)
66
how do internal economies of scale occur ?
growth in the scale of production within a firm
67
when do external economies of scale occur ?
when there is an increase in the size of the industry in which the firm operates in ?
68
what are 4 types of external economies of scale ?
geographic cluster (firms move closer to manufacturers)
improved transport links
increase in skilled labour
favourable legislation
69
what are 4 causes/ types of diseconomies of scale ?
management (when managers work more in their own interest than in the interest of the firm)
communication (when a firm with multiple layers of management & perhaps in multiple geographic locations, struggle to communicate quickly & efficiently leading to slow responses & increased AC)
geographical (when a firm has widespread bases of operations & this leads to logistical and communication challenges which can raise the AC)
cultural (when a firm expands into foreign markets in which workers have very different cultural work/productivity norms which can raise the AC)
70
what is the difference between short run and long run in terms of costs ?
in the short run, firms will operate on their SRAC
in the long run, firms will increase its capacity (e.g. build a new factory), and then operate for a period of time on a new short-run cost curve
71
what occurs in the short run ?
day to day operations of a firm
72
what occurs in the long run
firms plan to increase scale of production and lower AC (move into a new SRAC curve)
73
what is the equation for total revenue ?
selling price x quantity sold
74
what is the equation for average revenue ?
total revenue / quantity
75
what is the equation for marginal revenue
change in total revenue / change in quantity
76
in a perfectly competitive market where the firm is a price taker, as output increases how does price and revenue respond ? and why ?
price per unit stays the same, resulting in a directly proportionate increase in total revenue
A higher price would decrease sales to zero due to competition
A lower price would result in all sellers lowering their price due to competition
77
in an imperfectly competitive market where the firm is a price maker, as output increases how does price and revenue respond ? and why ?
price per unit will fall, resulting eventually in a decrease in total revenue
In order to sell an additional unit of output, the price (AR) must be
78
what are explicit costs ?
costs that have to be paid
e.g. raw materials, wages
79
what are implicit costs ?
the opportunity costs of production
80
where does normal profit occur ?
TR = TC
81
where do supernormal profits occur ?
TR > TC
82
what are the roles of profit in a market economy ?
incentive for innovation and entrepreneurship
allocation of resources (When businesses earn profits, it indicates that they are meeting consumer demands efficiently)
competition (benefits consumers by providing them with better products at lower prices)
economic growth
wealth creation
83
why is competition good for consumers ?
benefits consumers by providing them with better products at lower prices
84
what is the definition of invention ?
the creation of entirely new products and processes that did not exist before
85
what is innovation ?
the development of existing products, designs or ideas to improve them or introduce new features
86
what does advances in technology enable ?
improved:
- production
- productivity (increase output per unit)
- efficiency (reduces waste, optimal allocation of resources)
all these factors have potential to decrease cost of production
87
what does technological change cause (negative) ?
(creative desruction) decline of traditional industries due to innovation
88
how can technology reduce barriers to entry ?
small firms may be able to enter markets normally dominated by larger firms
89
how can technology reduce information asymmetry ?
web technologies can present large amounts of information quickly
90
how can technology increase competition ?
increased access to larger markets, ecommerce
91
how can technology increase market power ?
can result in the formation of more oligopolies and monopolies
92
what is the explanation in terms of MP, behind the theory of diminishing marginal returns ?
if marginal product is positive, then each individual worker brought in will increase output.
when marginal product is negative, then each individual worker brought in will decrease output.
93
why is the AC (U shape) and the AP (upside down U shape) curve shaped the way it is ?
diminishing marginal utility
94
Why economics of scale occur (AC fall as output rises) ?
% change in output is greater, than the % change in inputs (costs of FOP).
AC fall (increasing returns to scale)
95
What is the MES (minimum efficient scale) on the LRAC curve ?
It’s the lowest level of output where AC are at their minimum (economies of scale are fully exploited).
96
Formula for economies of scale ?
AC = TC increase / QTY increases exponentially
97
What do some firms have the objective of profit maximisation (mc= mr) ?
Reinvestment of profits (source of finance)
Dividends for shareholders
Lower costs, economies of scale
Lower prices for consumers
Reward for entrepreneurship
98
Why don’t some firms have the objective of profit maximisation ?
Hard to be aware of where your MC = MR
Greater scrutiny (investigation by government)
Key stakeholders may be harmed
(Little focus on employees and cost cuts on wages, environment, consumers may suffer from higher profits)
99
Why may firms have an objective of revenue maximisation (MR = 0) ?
Benefit from economies of scale (greater quantities and output than profit maximising)
Predatory pricing (able to set a Lower price, to drive out competitors)
Managers can use revenue maximisation, as leverage to gain perks in jobs, rather than profit maximising which would automatically benefit shareholders
100
Why may a firm choose to have sales maximisation (AC + AR) , as there main objective ?
Ability to grow massively without making a loss, (breaking even)
Economies of scale (greater quantity)
Can limit competition, because your able to set a significantly lower price without making a loss
