Production, Costs & Revenue

Question 1

Define production.

Answer 1

Production is the conversion or transformation of material inputs into outputs that can be consumed.

Question 2

Define productivity.

Answer 2

Productivity is a measure of the efficiency with which inputs are transformed into outputs.

Question 3

What is the formula for labour productivity?

Answer 3

Output (over a period of time)
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Number of employees

e.g. 600 toys/20 workers = 30 toys per worker.

Question 4

Define specialisation.

Answer 4

Specialisation occurs when an individual, firm, area or economy focuses on producing a limited range (scope) of products.

Question 5

What is the division of labour?

Answer 5

The specialisation by individual workers. It involves breaking down production into multiple tasks, with each worker specialising in one task.

Question 6

What are the benefits of the division of labour?

Answer 6

The division of labour enables more effective production because:

• Workers specialise in jobs that suit their skills. This improves quantity and quality of production.
• Repetition can further improve productivity.
• Workers remain in one place, which saves time.

Question 7

What are the disadvantages of the division of labour?

Answer 7

The repetitive nature can lead to boredom and consequently:

• Lower productivity, due to inability to sustain concentration due to lack of variety.
• Higher absenteeism, because workers are more likely to dislike their work and will call in ill more often or find other excuses.
• Lower quality, as a lack of focus caused by boredom can lead to mistakes.

Question 8

Why does specialisation necessitate (need) an efficient means of exchange?

Answer 8

Workers and firms may not have a whole product they can trade. For example, a worker may only put screws in a circuit board, this means he does not have a good to trade. This is why money is used instead. It bridges the gap and is used as a medium of exchange.

Question 9

What is the difference between short-run and long-run costs?

Answer 9

Short-run costs are incurred in the short run, the time period in which the fixed factors of production CANNOT be changed.

Long-run costs are incurred in the long run, the time period in which the factors of production CAN be changed. This means the firm can increase it’s scale.

Question 10

Define fixed costs.

Answer 10

Fixed costs are expenses that do not vary directly with output in the short run.

Question 11

Define variable costs.

Answer 11

Variable costs are expenses that variable directly with output in the short run.

Question 12

What are total costs?

Answer 12

Fixed costs + variable costs

Question 13

What is the formula for average costs/average total costs?

Answer 13

Total costs
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Units of output

It’s the same for fixed and variable, but total costs (the numerator) is replace with either fixed or variable costs.

Question 14

What shape is an average cost curve and why?

Answer 14

U-shaped.

At low levels of output there is little scope (relevance) for specialisation or division of labour. There may also be some fixed factors that are underused. These variables lead to higher average costs.

As output rises, specialisation and division of labour allow inputs to be used more efficiently and thus short-run average costs (SRAC) fall. As output nears a firms capacity, it becomes more costly to produce additional items and so short-run average costs (SRAC) rise. This forms a U-shape.

Question 15

What is economies of scale?

Answer 15

When long-run average unit costs fall due to an increase in output.

Question 16

Define internal economies of scale.

Answer 16

Factors that lead to lower unit (average) costs as output increases.

This forms the first half of the U-shape.

Question 17

What are some types of INTERNAL economies of scale?

Answer 17

• Technical economies of scale: Larger firms can invest in expensive and specialist capital equipment.
• Financial economies of scale: It is cheaper for larger firms too access finance as they provide lower risk than small firms.
• Purchasing economies of scale: Higher output of larger firms means they can buy materials in bulk, lowering costs.
• Marketing economies of scale: Higher output means larger firms can spread advertising costs of more units of output.

Question 18

What is INTERNAL DISeconomies of scale? What are examples of internal diseconomies of scale?

Answer 18

Internal diseconomies of scale are factors that lead to higher unit (average) costs as output increases.

It can happen when a firm becomes too large and forms the second half of the U-shape.

Examples:

• Ineffective coordination: Larger firms can experience this due to higher output and it leads to it becoming harder to control the firm.
• Lower worker morale: Employees in larger firms may feel their opinions are less valued.
• Poor customer experience: As more communication barriers occur in larger firms.

Question 19

What is EXTERNAL economies of scale? What are examples of internal diseconomies of scale?

Answer 19

External economies of scale are factors outside of a firm but within an industry that lead to lower unit (average) costs as output increases in an industry as a whole.

Examples:

• Creation of research and development facilities in universities: This benefits multiple businesses with new knowledge.
• Government spending on transport: Improves transport network making it easier for businesses to transport goods.
• Relocation of component suppliers near to manufacturing areas: This lowers transport costs for lots of businesses in an industry.

Question 20

What are the differences between internal and external economies of scale?

Answer 20

Internal economies of scale:

• Leads to expansion of the firm itself
• Lower long run average costs
• Efficiencies from larger scale production

External economies of scale:

• Leads to expansion of the industry
• Benefits most/all firms
• Helps to explain the rapid growth of many cities.

Question 21

What is the formula for total revenue?

Answer 21

Price x Quantity sold.

Question 22

What is the formula for average revenue?

Answer 22

Total revenue
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Quantity sold