Production, Costs & Revenue

Question 1

What is a productivity gap?

Answer 1

The difference in labour productivity between countries.

Question 2

What is productivity

Answer 2

Output per unit of input

Question 3

What is labour productivity?

Answer 3

Output per worker.

Question 4

What is capital productivity?

Answer 4

Output per unit of capital.

Question 5

What is specialisation?

Answer 5

A worker only performing one/a narrow range if tasks.
Firms specialising in producing different goods/services.

Question 6

What is the division of labour?

Answer 6

Different workers performing different tasks in the course of producing a good or service

Question 7

What are the benefits of specialisation & division of labour?

Answer 7

• Allows workers to become more skilled & efficient in the task
• Economies of scale as they can produce at larger scales reducing average costs
• Less time switching between tasks = + efficiency
• Innovation & technological advancements
• More efficient resource allocation
• Higher quality products

Question 8

What is the short run?

Answer 8

The time period in which at least one of the factors of production is fixed & cannot be varied

Question 9

What is marginal returns of labour?

Answer 9

The change in the quantity of output resulting from the employment of one or more worker, holding all the other factors of production fixed.

Question 10

What is the long run?

Answer 10

A time period in which the scale of all of the factors of production can be changed.

Question 11

What is the law of diminishing of marginal returns (productivity)?

Answer 11

A short term law - as a variable factor of production is added to a fixed factor of production, both the marginal and eventually the average returns to the variable factor will begin to fall.

Question 12

What are the Total Returns (TR)?

Answer 12

The whole output produced by all the factors of production employed by a firm.

Question 13

What is average returns of labour?

Answer 13

Total output/Workers employed

Question 14

What is increasing returns to scale?

Answer 14

When the scale of all the factors of production employed increases, output increases at a faster rate.

Question 15

What is constant returns to scale

Answer 15

When the scale of all the factors of production employed increases, output increases at the same rate.

Question 16

What is decreasing returns to scale?

Answer 16

When the scale of all the factors of production employed increases, output increases at a slower rate.

Question 17

What is a fixed cost?

Answer 17

A cost of production which, in the short run, does not change with output.
e.g rent
All costs are variable in the long run.

Question 18

What is a variable cost?

Answer 18

A cost of production which changed dependent on output.
e.g cost of extra workers, resouces

This exists in both the long run and short run.

Question 19

What is the total cost?

Answer 19

All the cost incurred when producing a particular size of output.

TC = TFC + TVC

ATC = AFC + AVC

Question 20

What is average variable cost (AVC)?

Answer 20

AVC = TC/Output

Question 21

What is marginal cost?

Answer 21

Additional to total cost resulting from producing one additional unit of output.

Question 22

What is average fixed cost (AFC)?

Answer 22

AFC = TFC/Q

Question 23

What are economies of scale?

Answer 23

As output increases, LRAC falls.

Question 24

What are diseconomies of scale?

Answer 24

As output increases, LRAC increases.

Question 25

What are internal economies & diseconomies of scale?

Answer 25

Changes in the long run average costs of production resulting from changes in the size/scale of the firm.

Question 26

What are external economies/diseconomies of scale?

Answer 26

A fall/increase in LRAC from growth of the market/industry the firm is in.

Question 27

What are technical economies of scale?

Answer 27

It is a type of internal economy of scale, generated through changes to the ‘productive process’ as the scale of production and the level of production & level of output increases. E.g spreading of research & development costs

Question 28

What are managerial economies of scale?

Answer 28

An internal economy of scale, the benefit gained from the division of labour within management.

Question 29

What are marketing economies of scale?

Answer 29

A type of internal economy of scale. Large firms may be able to use their market power to buy their supplies at lower prices.

Question 30

What are financial/capital-rising economies of scale?

Answer 30

A type of internal economy of scale. Large firms can often borrow from banks and other financial institutions at a lower rate of interest.

Question 31

What are risk-bearing economies of scale?

Answer 31

A type of internal economy of scale. Large firms can spread risks by diversifying their output, markets, sources of finance etc making firms less vulnerable to sudden changed in demand or supply side shocks.

Question 32

What are economies of scope?

Answer 32

A type of internal economy of scale. Factors that make it cheaper to produce a range of products together, than each one on their own.

Question 33

What are managerial diseconomies of scale?

Answer 33

A type of internal diseconomy of scale. Growth of firm causes administration to become more difficult & poor decisions are made. Can result in communication failure.

Question 34

What are motivational diseconomies of scale?

Answer 34

It is a type on internal diseconomy of scale Over specialisation may lead to de skilling and to a situation in which workers perform repetitive tasks & have little incentive.

Question 35

What is total revenue (TR)?

Answer 35

All the money received by a firm from selling its total output.

Question 36

What is average revenue (AR)?

Answer 36

TR/Q

Question 37

What is marginal revenue (MR)?

Answer 37

The addition to the total revenue from selling one more unit.

Question 38

What is profit maximisation?

Answer 38

MR = MC

Question 39

What is normal profit?

Answer 39

The minimum profit a firm must make to stay in business

Question 40

What is supernormal (abnormal) profit?

Answer 40

Profit above normal profit

Question 41

What are the roles of profit in a market economy?

Answer 41

- Creation of worker incentives - Creation of shareholder incentives - Source of business finance - Reward for innovation & risk taking

Question 42

What is dynamic efficiency?

Answer 42

Measures the improvements in productive efficiency that occur over time.