Production Costs & Revenues

Question 1

Productivity is calculated by?

Answer 1

Output per worker per time period

Question 2

Being more productive means what in terms of inputs & outputs:

Answer 2

The same input produces more output, over the same time period

Question 3

Being less productive means what in terms of inputs & outputs:

Answer 3

It requires a larger input to produce the same quantity of output

Question 4

Productivity can be increased by?

Answer 4

Training more workers or using more advanced capital

Question 5

Specialisation occurs when?

Answer 5

Each worker completes as specific task in a production process.

Question 6

Through the division of labour what can increase?

Answer 6

Worker productivity can increase, which means firms can take advantage of increased effiency & lower average costs of production

Question 7

Advantages of specialisation:

Answer 7

• Higher output & potentially higher quality, since production process can focus on what individuals & businesses are best at.
• There are more opportunities for economies of scale, so the size of the market increases
• There is more competition which gives incentive for firms to lower their costs, which keeps prices down
• There could be greater variety of goods & services produced

Question 8

Disadvantages of specialisation:

Answer 8

• Work becomes monotonous, which can lower worker motivation, effecting quality & productivity.
• ## More structural unemployment, since skills might not be transferable as they’ve only been focused on 1 task.

Question 9

Countries can also specialise in the production of certain goods: explain that using comparative advantage

Answer 9

Countries can exploit their comparative advantage in a good, which means they can produce a good at a lower cost

Question 10

The functions of money:

Answer 10

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

Question 11

Difference between short run & long run

Answer 11

Short run - at least one factor is fixed
Long run - factors are variable

Question 12

Marginal returns:

Answer 12

The extra output derived per extra unit of the factor employed

Question 13

Average returns:

Answer 13

The output per unit of input

Question 14

Total returns:

Answer 14

The total output produced by a number of units of factors over a period of time

Question 15

The law of diminishing returns:

Answer 15

As more of a variable factor is added to fixed factors, marginal output will at first rise then fall.

Question 16

Returns to scale:

Answer 16

Refers to the change in output of a firm after an increase in factor inputs

Question 17

Increasing returns to scale:

Answer 17

When the output increases by a greater proportion to the increase in inputs

Question 18

Descreasing returns to scale:

Answer 18

If input increase in proportionally bigger than output increase

Question 19

Constant returns to scale:

Answer 19

When output increases by the same amount that input increases by

Question 20

In the short run costs are what?

Answer 20

Fixed, as at least one factor of production cannot change

Question 21

In the long run costs are what?

Answer 21

Costs are variable, as factors can change

Question 22

Fixed costs & output

Answer 22

They don’t vary with output

Question 23

Variable costs:

Answer 23

They change with output

Question 24

Total costs equation

Answer 24

Total costs = variable costs + fixed costs

Question 25

Total cost is?

Answer 25

The cost to produce a given level of output

Question 26

Average costs are?

Answer 26

Cost per unit

Question 27

Average cost equation:

Answer 27

Total costs / quantity produced

Question 28

Marginal cost is?

Answer 28

The cost of producing one extra unit of output.

Question 29

Short run average total cost curve:

Answer 29

It is U shaped due to law of diminishing returns. This is because the factors of production are fixed. At one point, employing more resources will be less productive, which means marginal output will decrease per extra factor of production.

Question 30

Long run average cost curve

Answer 30

Initially average costs fall due to economies of scale. After, optimum level of output (minimum efficient scale), diseconomies of scale occur and average costs rise.

Question 31

How factor inputs affect firms cost of production:

Answer 31

If factor inputs become more productive, firms can produce more output with fewer inputs. This results in lower unit costs of production. As average cost per unit of a factor input increases, firms are likely to swap to cheaper factor inputs, such as capital.

Question 32

Internal economies of scale definition:

Answer 32

These occur when a firm becomes larger and average costs of production fall as output increases.

Question 33

Examples of internal economies of scale

Answer 33

REALLY FUN MUMS TRY MAKING PIES R - risk-bearing: if one part not successful, they have others to fall back on F - financial: banks willing to loan cheaply to large firms M - managerial: specialise & divide labour, can employ specialists which lower AC T - technological: invest in more advanced & productive capital M - marketing: divide marketing budget across larger outputs P - purchasing: can bulk-buy, so each unit will cost less

Question 34

External economies of scale:

Answer 34

These occur within the industry E.g. local roads might be improved, so transport costs for the local industries will fall. There might be more training facilities or more research & development.

Question 35

Diseconomies of scale:

Answer 35

This occurs when output surpasses a certain point & average costs start to increase per extra unit of output produced

Question 36

Factors causing diseconomies of scale:

Answer 36

Control: it becomes harder to control & monitor how productive the workforce, as the firm gets larger Coordination: it is harder & complicated to coordinate every worker, when there are thousands of employees Communication: workers may start to feel alienated & excluded as the firm grows, motivation & producivity falls

Question 37

Relationship between returns to scale & economies of scale

Answer 37

Returns to scale increases when the output increases by a greater proportion to the increase in inputs. This occurs when there are economies of scale & factor inputs become more productive.

Question 38

Relationship between returns to scale & diseconomies of scale:

Answer 38

Returns to scale decrease when output increases by a smaller proportion than the increase in inputs. This is linked to diseconomies of scale, since it occurs when factor inputs become less productive

Question 39

Total revenue

Answer 39

This is the revenue received from the sale of a given level of output. Price x quantity sold

Question 40

Average revenue

Answer 40

Average revenue is the receipt per unit (the price each unit is sold for) Total revenue / quantity sold

Question 41

Marginal revenue

Answer 41

The extra revenue earned from the sale of one extra unit - difference between total revenue at different levels of output. Change in total revenue / change in quantity sold

Question 42

Why the average revenue curve is the firm’s demand curve

Answer 42

Average revenue represents the price at which a firm can sell its output, which is also the price consumers are willing to pay, thus showing the demand for the firm's product.

Question 43

What is the relationship between AR & MR when demand is perfectly elastic

Answer 43

When demand is perfectly elastic, marginal revenue = average revenue

Question 44

Normal profit:

Answer 44

It’s the minimum amount of profit required to keep firm afloat. It covers opportunity cost of investing funds into the firm & not elsewhere. It’s when total revenue curve = total costs.

Question 45

Supernormal profit:

Answer 45

Any profit above normal profit. It exceeds the value of opportunity cost of investing funds into the firm. This is when total revenue exceeds total cost.

Question 46

Role of profit

Answer 46

In a free market, profit is reward for taking risks & making investments Incentivise innovation, as firms want to reduce production costs, improve quality & maximise profits. Source of finance for firms Profits act as a signal to firms to enter the market

Question 47

Impacts of technical change

Answer 47

Technological change can result in improvements in efficiency and productivity, which could lower costs of production for firms. The quality and quantity of goods and services produced might improve. Technological change can lead to the development of new products, the development of new markets and may destroy existing markets - creative destruction

Question 48

How can technological change influence the structure of markets: monopolies & oligopolies

Answer 48

Monopolies do not have an incentive to innovate, since they have no competition. This means they are often inefficient and their costs are higher than they could be. Oligopolies tend to have more of an incentive to innovate, since they are earning supernormal profits and are trying to get ahead of their competitors. This means that technological change is quite fast in oligopolies.