Production, Costs + Revenue Flashcards
Productivity
The ouput given per factor input, used to measure the efficiency of the economy.
Labour Productivity
The output per worker / per hour of labour, used to compare individual workers or the overall efficiency of the labourforce.
Specialisation / Division of Labour
Adam Smith - 1777 Wealth of Nation
Occurs when a firm/economy is able to split the production process into small steps which workers can them become skilled at, giving the nation a comparative advantage in the production of that good or service
Advantages of Specialisation
As costs will be reduced, consumers experience lower prices
The world’s resources are utilised in an efficient way
Global output is increased
Living standards are improved
Disadvantages of Specialisation
Domestic firms may be forced to shut down if foreign firms are better at producing goods than them - creative destruction / structural unemployment.
Specialisation can lead to overreliance on one industry, leaving it very susceptible to external shocks, ie. Poor crop yields (Weather), Stock Market Crashes or break downs of international relations.
High occupational immobility
Importance of Money after specialisation
If nations specialise, trade becomes essential, requiring a medium of exchange.
This can be done via a barter system, however this is inefficient as it requires 2 nations to want to exchange goods of the same value
Money is a more efficient medium of exchange
Functions of Money (4)
Medium of Exchange
Store of Value
Measure of value
A standard of deferred payment
Law of diminishing returns
Beyond a certain point, employing an additional factor to a fixed set of factors of production causes a relatively smaller increase in output.
MC is inversely related to MR, as lower additional output results in a greater marginal cost
Affects SR - ie. Short-Run Average Costs (SRAC)
Types of Returns to Scale (3)
Occurs in the Long- Run
An increase in factor inputs results in -
Increasing - A proportionally greater increase in output
Constant - The same proportional increase in output
Decreasing - A proportionally lesser increase in output.
Economies of Scale (Definition)
The cost advantage of producing on a large scale, ie. AC falls as output increases as high fixed costs are spread across a large output.
Internal Economies of Scale (RFMTMP)
Risk-Bearing
Financial
Managerial
Technological
Marketing
Purchasing
External Economies of Scale (4) - SIRE
Local Education Institutions may adapt to the needs of local large businesses
Infrastructure around the firm improves
Suppliers relocate near to large firms
R+D relocates near to large firms
Diseconomies of Scale (CCCM)
Control
Communication
Co-ordination
Morale
Minimum Efficient Scale
The lowest AC that can be achieved by a firm, ie. EoS have been fully utilised and DoS have not begun.
This is the lowest point on a firm’s LRAC
Why does the demand curve = AR
AR = Total Revenue / Output
Price is equal to the average revenue of a good, therefore, as the demand curve reflects the quantity of good demand at each price, the quantity demand can be X by the Price (AR) to reveal total revenue.
