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Economics FC from P@M Tutor Micro > Production Costs And Revenues Part 1 > Flashcards

Production Costs And Revenues Part 1 Flashcards

1
Q

What is production?

A

A process that converts inputs such as the services of factors of production from capital and labour into a final output.

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2
Q

What does production end up doing?

A

Satisfying customers

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3
Q

How is production calculated?

A

Output per worker per period of time

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4
Q

What does being more productive mean?

A

The same input produces more output
(You produce more over the same period of time)
An input may be n. Workers

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5
Q

What does being less productive require?

A

An input to become larger whilst the quantity of output stays the same
Or the quantity of output to decrease whilst the input stays the same

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6
Q

How may you increase productivity?

A

Training workers
Using machinery

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7
Q

What is another way to say that a firm is more productive?

A

The average cost of unit has decreased

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8
Q

When does specialisation occur?

A

When each worker completes a specific task in the production process

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9
Q

Who stated the concept of specialisation?

A

Adam Smith

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10
Q

What did Adam Smith do?
What does this lead to?

A

He was an economist
He invented the idea of specialisation
He showed that through the division of labour worker productivity can increase.

Firms will then take advantage of this and increase productivity and lower average unit costs

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11
Q

Who can achieve specialisation?

A

Individuals
Businesses
Entire countries
(Pretty much everyone)

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12
Q

What are the advantages of specialisation?

A

Higher output
Potential higher quality
You can increase your portfolio as costs decrease
There are more opportunities for economies of scale therefore the size of the market could grow
More competition leading to an inventive to lower prices

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13
Q

What are the disadvantages of specialisation?

A

Work becomes repetitive which could lead to low motivated workers and therefore this could lead to a decrease in efficiency and low retention of staff etc
Employment may become more structural as skills may nit be transferable
It could end up decreasing product variety for the consumer
Could be higher worker turnover due to the repetitive nature of the job

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14
Q

What is a comparative advantage?

A

An economies ability to produce a good at a lower opportunity cost to another

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15
Q

When does absolute advantage occur?

A

When a country can produce more of a good with the same factor inputs

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16
Q

What are the advantages of specialisation in terms of trade?

A

Greater world output so there is a gain in economic welfare
Lower average costs as the market becomes more competitive
There is an increased supply of goods to choose from
There is an outwards shift in the PPF curve

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17
Q

What are the disadvantages of specialisation in terms of trade?

A

Less developed countries may use up their resources too quickly
Environmental damage is fossil fuels are used
Countries may become dependent on imports. Which could be disrupted.

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18
Q

What are the functions of money?

A

A medium of exchange
A measure of value
A store or value
A method of deferred payment

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19
Q

Explain the function of money: A medium of exchange?

A

A better system than bartering so that both people can get what they want

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20
Q

What was used before money?
What were the disadvantages?

A

Bartering
You could only get something if you had something that someone else wanted
Trades may not always be even

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21
Q

Explain the function of money: a measure of value

A

It gives us an ability to create a numerical value for things
Money also puts a value on labour

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22
Q

Explain the function of money: a store of value

A

It can be kept for a long time without expiring or becoming completely worthless

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23
Q

Explain the function of money: A method of deferred payment

A

It can allow for debts to be created so people can buy now and pay latter

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24
Q

What is the short run?

A

The scale of production is fixed - there is at least one fixed cost

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25
Q

What is the long run?

A

The scale of production is flexible so it can be changed - all costs are variable

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26
Q

What is the marginal return of a factor?

A

The extra output derived per extra unit of the factor employed

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27
Q

What is the average return of a factor?

A

The output per unit of input. (Output per worker) ÷ time

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28
Q

What is the total return of a factor?

A

(The total output produced by a number of units of factors) ÷ time

This amount of capital is fixed

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29
Q

Which do diminishing returns happen in. The long run or the short run?

Why?

A

Only in the short run

The variable factors could be increased in the short run. But over time the increase will become less productive so the marginal return of it falls. Then if you add another unit but it won’t produce as much as the additional unit

Therefore total output still rises but it increases at a slower rate

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30
Q

What is diminishing marginal returns linked to?

A

How productive labour is

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31
Q

What does the law or diminishing returns assume?
Why may this not be true?

A

That firms have fixed factor resources in the shirt run and that the state of technology remains constant
There are increases in practices such as out-sourcing meaning that firms can cut their costs and their production can be flexible

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32
Q

What does returns to scale mean?

A

The change in output of a firm after an increase in factor input

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33
Q

When does returns to scale increase?
Give examples

A

When the output increases by a greater proportion to the increase in input
An increase of 2 (double) unit input and 8 (quadruple) units output shows an increase in returns to scale
An increase or 2 units input and 3.5 output shows an decrease in returns to scale

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34
Q

What are returns to scales linked to?

A

Diseconomies and economies of scale

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35
Q

What is constant returns to scale?

A

Where output increases by the same amount that inout increases by

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36
Q

In the short run what must be the case?

A

There must be some fixed costs

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37
Q

What must be the case for the long run?

A

All costs are variable

38
Q

What are fixed costs?
Give some examples

A

Costs that so not vary with output. They are indirect.

Rent

39
Q

What are variable costs?

Give an example

A

Costs that change with output. They are direct.

Raw materials

40
Q

What is total cost?
How do you calculate it?

A

The cost to produce a given level of output

Total Cost = Total Fixed Cost + Total Variable Cost
TC = FC + VC

41
Q

What is average cost?
How do you calculate it?

A

The cost per unit
Average Cost = (Total Costs) ÷ Quantity Produced

AC = TC ÷ Q

42
Q

What is the marginal cost of production?
What can we infer about this?

A

The cost of producing one extra unit of output
We can infer, because of the law of diminishing returns, that after a point marginal cost rises as output increases

43
Q

What shape is a short run average total cost curve?
Why?

A

U shape
Because of the law of diminishing returns.
And, since the factors of production are fixed at one point employing more resources will be less productive meaning that the marginal output decreases per extra factor of production. (Marginal costs start to increase)

44
Q

Describe and explain a long run average cost curve

A

U shaped
At first the average costs decrease due to economies of scale until you get to the lowest point where you are at your optimum efficiency.

Then average costs start to increase due to diseconomies to scale

45
Q

What happens if factor inputs become more productive?

A

A firm can produce more with the same level of input so the average unit cost decreases

46
Q

What happens if factors of production become more expensive?

A

Firms will usually switch to cheaper means of production (and generally more productive) factor inputs such as capital

47
Q

When do internal economies of scale occur?

A

When a firm becomes larger

48
Q

What is internal economies of scale?

A

Average cost of production falls as output increases
(As a business gets bigger)

49
Q

Give the examples of internal economies of scale

A

Really Fun Mums Try Making Pies

Risk bearing
Financial
Managerial
Technological
Marketing
Purchasing

50
Q

Explain the example of internal economy: Risk bearing

A

As a firm gets larger they can expand their production range. Therefore, they can spread the cost of uncertainty so if one part fails they have another part to fall back on

51
Q

Explain the example of internal economy: Financial

A

Banks are willing to loan money to more reliable firms. Therefore large firms may get more loan opportunities or better (cheaper) loans

52
Q

Explain the example of internal economy: Managerial

A

Larger firms are more able to specialise and divide their labour. They can therefore employ specialise managers and supervisors. This may help lower average unit cost

53
Q

Explain the example of internal economy: Technological

A

Larger firms can get capital intensive machinery reducing labour costs

54
Q

Explain the example of internal economy: Marketing

A

Advertising is cheaper or they can do more

55
Q

Explain the example of internal economy: purchasing

A

Bulk buying so the average unit cost will decrease

56
Q

What is networking economies of scale?

A

The gains from the expansion of e-commerce. It makes it easier to sell as it is easy to access new customers and to display new/existing products

57
Q

Where does external economies of scale occur?

A

Within an industry
(Smaller scale)

58
Q

When does diseconomies of scale happen?

A

When a business gets to big and the average cost of production increases

59
Q

Why may diseconomies of scale happen?

A

Control
Coordination
Communication

60
Q

Explain the prompt of diseconomies of scale: Control

A

It becomes harder to monitor workers as you have too many so productivity may decrease

61
Q

Explain the prompt of diseconomies of scale: Coordination

A

It becomes harder and more complicated to coordinate through employees and different branches of a business

62
Q

Explain the prompt of diseconomies of scale: Communication

A

Workers could feel alienated and unappreciated. This could lead to low moral and therefore less production, staff retention…

63
Q

On a long run average cost curve what does the turning point represent

A

The LRAC (Long Run Average Costs) is the minimum efficient scale
This is where the optimum level of output is since costs are at the lowest possible and economies of scale have been fully utilised

64
Q

What is the difference between SRAC and LRAC?

A

Short run and Long run

65
Q

What graph do you get when you combine the LRAC and the SRAC?

A

the LRAC curve

66
Q

Describe and explain is the LRAC graph?

A

L shaped
It shows the relationship between the SRAC curve and the LRAC curve
The LRAC curve envelopes the SRAC curve.
The LRAC curve is always equal to or below the SRAC curve
SRAC falls at first but then increases due to the law of diminishing returns.
In the long run costs change due to economies and diseconomies of scale
If SRAC=LRAC the firm is operating where it can vary all factor inputs

The L shape of the curve (is a development of cost theory) as it suggests that:
At first costs per unit will fall as output increases due to economies of scale and because of this even if there are diseconomies of scale they will be offseted by economies of scale. This suggests that in the long run costs will continue to fall, even if the pace of falling output cost slows down (this is shown by the flat bit of the curve)

67
Q

When does the LRAC shift?

A

When there is external economies of scale (when the industry grows)

68
Q

What do we know when LRAC = SRAC?

A

The firm is operating where it can vary all factor inputs

69
Q

Why is the L shape of the LRAC curve important?

A

The L shape of the curve (is a development of cost theory) as it suggests that:
At first costs per unit will fall as output increases due to economies of scale because of this even if there are diseconomies of scale they will be offseted by economies of scale. This suggests that in the long run costs will continue to fall, even if the pace of falling output cost slows down (this is shown by the flat bit of the curve)

70
Q

How is TR calucated

A

TR = Total Revenue

P X Q
Price X quantity sold

71
Q

What is total revenue?

A

Price X Quantity sold. This is the revenue received from the sale of a given level of output

72
Q

How do you calculate AR?

A

AR = Average Revenue

TR ÷ Q
(Total Revenue ÷ Quantity sold

73
Q

What is average revenue?

A

(Total Revenue ÷ Quantity sold). This is the price each unit is sold for

74
Q

What is marginal revenue?

A

The extra revenue earned from the sale of 1 extra unit. It is the difference between total revenue at different levels of output

75
Q

What is the AR curve equal to?

Why?

A

Average revenue curve is the same as the demand curve

This is because the average revenue curve is the price of a good

76
Q

Why may the AR curve be horizontal?

A

All the firms are price takers

77
Q

What does a horizontal AR curve show?

A

Perfect elastic demand for the good
MR = AR

78
Q

What is profit?

A

The differnece between TR and TC
P = TR-TC

It is the reward that entrepreneurs get from taking risks

79
Q

When is marginal revenue = average revenue

A

MR=AR when demand is perfectly elastic

80
Q

What does marginal revenue measure?

A

MR measures the change in total revenue with respects to the change in the quantity of goods sold

81
Q

How do you calculate marginal revenue?

A

MR= ΔTR ÷ ΔQ
Marginal revenue = the change in total revenue ÷ the change in quantity sold

82
Q

What is normal profit?

A

Normal profit is the minimum reward required to keep entrepreneurs supplying their enterprise. It covers the opportunity cost of ingesting into the enterprise and not elsewhere.
T
Normal profit is when TR=TC. Normal profit is considered to be a cost, so it is included in the costs of production

83
Q

What is supernormal profit?

A

The profit above normal profit.
So this exceeds the opportunity cost of investing. TR>TC

84
Q

Why is profit useful in markets?

A

It encourages people to invest and take risks
It encourages competition
-Improves innovation
-Improves profit
-Increases efficiency

Can be used as a source of cash flow for the firm
It can be used as a guid of where profit can be made (for other new firms)
Factors of production are usually used in markets where the rate of retuned (profit) is highest

85
Q

What is invention?

A

The process of creating a new product or a new way to make a product

86
Q

What is innovation?

A

The act of improving or contributing to existing products

87
Q

Why are technological advances normally good in reference to production, productivity, efficiency and cost of production?

A

It can result in improvement in efficiency and productivity. This could lower costs of production for a firm
The quality of goods could increase
The quantity of goods produced could increase

It can lead to the development of new products and markets

“Creative destruction”

88
Q

Why are advances in technology bad in reference to production, productivity, efficiency and cost of production?

A

It could destory market
It could increase unemployment
It makes it harder for small and medium sized businesses to compete - we need SMEs to create competition so innovation is encouraged

89
Q

Who proposed the idea of creative destruction?

A

Schumpeter

90
Q

What idea did schumpeter suggest?

A

Creative destruction

This is the idea that new entrepreneurs are innovative, which challenges existing firms. This results in more productive firms making profit whilst the unproductive firms make losses and will drop out of the market. This could all result in an expansion of the economy’s productive potential

91
Q

How can technological changes influence the structure of a market?

A

If competition is decreased as smaller firms can’t survive without machines monopolies will occur more often, and they will have less motivation on innovate due to the lack of competition. This means they will often be inefficient and their costs will be higher than they need to be.

Oligopolies tend to have a higher incentive to innovate since they are earning supernormal profit and they want to keep ahead of the competition.

92
Q

Why is technological change in oligopolies quick?

A

Firms are trying to get ahead of other firms to keep making supernormal profit

Economics FC from P@M Tutor Micro (23 decks)

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