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Micro Y2 > Schedule G - Production, Costs, Revenue And Profit > Flashcards

Schedule G - Production, Costs, Revenue And Profit Flashcards

1
Q

What is production?

A

Converting inputs of raw materials and the services of the various FOPs such as labour, capital and machinery into outputs.

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2
Q

What is productivity?

A

Output per factor of productions employed per unit of time (it is a measurement of the rate of production by one or more FOPs, efficiency)

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3
Q

Equation for productivity

A

Productivity = total output per period of time/number of units of factor of production

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4
Q

Equation for labour productivity

A

Labour productivity = total output per period of time/number of units of labour

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5
Q

How can we improve labour productivity

A
  • More and better education
  • Training
  • Increased motivation
  • advances in technology, leading to workers being equipped with the latest capital
  • specialisation and division of labour can also facilitate more effective use of specialist capital and equipment which can lead to further increases in labour productivity
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6
Q

What is division of labour?

A

Specialisation at the level of an individual worker

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7
Q

What are some benefits of specialisation and division of labour?

A
  • Repetition of a limited range of activities can increase skill and aptitude, producing experts
  • Reduced time spent moving between different tasks or workstations means increased productivity
  • As tasks are broken up into smaller ones, it becomes efficient to use specialist machinery
  • Division of labour allows people to work to their natural strengths
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8
Q

What is the short run?

A

A period of time in which the availability of at least one factor of production is fixed

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9
Q

What is the long run?

A

A period of time over which all factors of production can be varied

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10
Q

Which types of factors of production are likely to be fixed in the short run?

A

Land or capital equipment

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11
Q

Which type of factors of production are likely to be variable in the short run?

A

Labour - more flexible though not entirely

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12
Q

How does long run and short run affect whether firms can increase or decrease scale of output?

A

In the long run, all factors of production can be varied so a firm can increase or reduce its scale of output
In the short run, firms will have some fixed costs of production for which they must pay even if they do not increase output, along with variable costs of production that change with their level of output. They can increase scale of output up to the the point where spare capacity is utilised and productivity maximised.

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13
Q

What is total product?

A

Total output (sometimes known as returns) of units produced

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14
Q

What is marginal product?

A

The additional output produced when an extra worker (or other factor of production) is employed (the change in total product when an additional unit of the variable factor of production is employed)

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15
Q

What is average product?

A

Total output/Number of workers (kinda same as productivity)

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16
Q

What is the law of diminishing returns?

A

In the SHORT RUN, the law of diminishing returns states that as we add more units of a variable input (e.g. labour) to a fixed quantity of another (e.g. capital), marginal product will AT FIRST RISE, THEN IT WILL FALL.

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17
Q

Why can we draw parallels between diminishing returns and disinflation?

A

Diminishing returns to labour occurs when marginal product of labour starts to fall. This means that total output will still be rising but increasing at a decreasing rate as more workers are employed. (Ms Baptiste is getting fatter but getting fatter at a slower rate)

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18
Q

What is the relationship to cost of the falling marginal product of extra labour?

A

When the marginal product of extra labour is falling - assuming that each worker is paid the same wage rate - then the marginal cost of supplying extra output will increase.

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19
Q

Show the flow of actions from diminishing returns to average variable cost rising

A

Diminishing returns —> fall in marginal product —> average product falls (fall in MP drags average down) —> Average variable cost rises (AVC curve)

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20
Q

Explain the law of diminishing returns [on labour]

A

In the SHORT RUN, at least one factor of production is fixed. Assuming this is capital, the only way to increase output is to employ more workers. Initially, adding an additional worker will cause productivity to rise as the workers can specialise and use some division of labour (if there is under utilisation of fixed FOPs, they can be used to increase productivity). However, as more workers are added to the fixed capital, the capital increasingly becomes scarce. There aren’t enough FOPs to take the increased labours so workers get delayed and get in each others way. This causes productivity ton fall. At the point where marginal product starts to fall, we say that ‘diminishing returns has set in’.

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21
Q

At which point does the average product of labour start to fall?

A

When marginal product of labour declines below existing average product, then the average product of labour will fall. I think this is why the MP curve on the way down must intersect with the AP curve at it’s turning point (when it starts to fall)

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22
Q

What is the link between the total product and marginal product? (Try to think about the graphs)

A

As long as marginal product is positive, the next worker will produce more product and total product should increase. At the point where marginal product becomes negative (crosses the x-axis on the descent), the next worker no longer produces more product than the last and total product starts to decrease (the peak point of the TP before it starts declining

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23
Q

What are returns to scale?

A

How the output of a business responds to a change in factor inputs is called the returns to scale

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24
Q

The nature of returns to scale affects the shape of a businesses’ ________

A

The nature of returns to scale affects the shape of a business’ long run average cost curve

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25
Q

Returns to scale is a long run cost concept. True or false?

A

Returns to scale is a long run production concept. Long run average cost curve impacts are a consequence, not the concept itself

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26
Q

Define what increasing returns to scale are

A

When the %change in output > %change in inputs

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27
Q

Define decreasing returns to scale

A

When the %change in output < %change in inputs

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28
Q

Define constant returns to scale

A

When the %change change in output = %change in inputs

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29
Q

When we consider the impact of increasing returns to scale on average costs, what do we call it?

A

Economies of scale

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30
Q

When we consider the impact of decreasing returns to scale on average costs, what do we call it?

A

Diseconomies of scale

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31
Q

Define fixed costs

A

Fixed costs are costs that do not vary with output

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32
Q

Define variable costs

A

Variable costs are costs that DO change with output

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33
Q

State 3 examples of fixed costs

A

Rent, business rates (equivalent of council tax), insurance, marketing/consultancy fees , salaries

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34
Q

State 3 examples of variable costs

A

Raw materials/stock, wages (paid by the hour), utility bills

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35
Q

True or false? In the long run, all costs will be variable costs

A

TRUE. In the long run, all factors of production can be changed. So in the long run all costs will be variable costs.

36
Q

What is the total cost of production (TC)

A

The total cost of production is the cost of producing a given level of output.

37
Q

How is total cost calculated?

A

TC=TFC+TVC

38
Q

Why does the total cost curve not start at the origin?

A

Because even at 0 output level, there is still a total cost. This results from the fact that fixed costs must be paid even if there is no production

39
Q

What is the average cost of production?

A

The average cost of production is the total cost divided by the level of output. This tells us how much 1 unit of output costs to produce.

40
Q

Since average cost is made up of AVC (average variable cost) and AFC (average fixed cost), thing logically and say the formula for:
A) Average variable cost
B) Average fixed cost

A

A) AVC = TVC/Q
B) AFC = TFC/Q

41
Q

What is the marginal cost of production and how is it calculated?

A

This is the cost of producing an extra unit of output. Marginal cost is calculated by dividing the change in total cost by the change in quantity (change in TC / change in Q)

42
Q

Which of these curves are shaped due to the law of diminishing returns?
A) Average fixed costs
B) Average Variable costs
C) Total fixed costs

A

A) Not shaped due to the law of diminishing returns
B) SHAPED DUE TO THE LAW OF DIMINISHING RETURNS
C) Not shaped due to the law of diminishing returns

43
Q

What are economies of scale?

A

Economies of scale are the reduced average total costs that firms experience by increasing output in the LONG RUN.

44
Q

Describe in terms of LRAC, what economies of scale are?

A

A reduction in LRAC, as output increases .

45
Q

What do reductions in costs reflect?

A

Reductions in costs reflect improvements in productive efficiency

46
Q

How do economies of scale give firms a competitive advantage?

A

They may give a firm a competitive advantage in the market in which it operates enabling it to pass on lower prices to consumers OR generate higher profits which might be reinvested or given to shareholders.

47
Q

What are internal economies of scale?

A

Reductions in long-run average total costs arising from the growth of the firm (come about by the growth of the firm itself)

48
Q

What is the acronym we use to remember different types of IEOS>

A

Really Fun Mums Try Making Sweet Pies

49
Q

What are Risk Bearing economies of scale?

A

Spreading risk over larger output range

50
Q

What are financial economies of scale?

A

Larger firms are more reputable so it is likely that banks and other lenders will deem them creditworthy (less risky recipient of loan funds). This will lead to cheaper loans, lower interest —> reduced costs.

51
Q

What are managerial economies of scale?

A

Larger firms can afford to recruit the highest profile CEOs who can be really effective in increasing profits through a combination of increasing revenues and reducing costs.

52
Q

What are technical economies of scale?

A

Larger firms can afford the sophisticated capital (very expensive) to aid production. Labour costs per unit of output will fall and the production process will be more efficient, e.g. Aston martin vs Toyota

53
Q

What are marketing economies of scale?

A

In larger firms, fixed costs such as advertising have a smaller effect on the cost per unit because the firm can spread this budget over a larger output than a smaller retailer

54
Q

Explain how specialisation of the workforce can confer economies of scale?

A

Larger firms can split the production processes into separate tasks to boost productivity. This also known as division of labour. Labour productivity is increased as expert knowledge is developed, training is easier and workers focus on doing what they are best at.

55
Q

What are purchasing economies of scale with an example?

A

Larger firms can purchase factor inputs in bulk at lower prices if it has monopsony power; e.g amazon has huge buying power in the publishing industry. With 30% market share, of the physical book market in the US and more than 60% of eBooks, it can use this power to reduce the prices it pays publishers for the books sold on the Amazon website.

56
Q

What are network economies of scale?

A

As some networks become more widely used (or adopted), they become more valuable to the business that provides them. In most cases, the marginal cost of adding one more user to the a network is nearly 0 but financial benefits could be large because each new user trades with existing members / parts of the network. There are high fixed costs of establishing a network and the more user, the more the network expands, the more gains received from extra revenues as well as LRAC per user diminish - an internal economy of scale.

57
Q

The development of successful financial services in the city of London has meant that firms in London have benefitted from easier access to specialised labour and infrastructure such as transport to the centre of the financial district. What type of economy of scale is this?

A

External economies of scale because this reduction in long run average total costs has risen from the growth in the industry in which they operate.

58
Q

How can we explain diseconomies of scale?

A

Diseconomies of scale occur when an increase in a firm’s output ceases to yield a reduction in average costs and begins to lead to increase in average costs of production.

59
Q

How can we define diseconomies of scale in the most succinct and elegant way possible?

A

Diseconomies of scale are increases in the unit cost of supply in the long run due to decreasing returns to scale.

60
Q

In relation to an LRAC curve, explain external economies of scale

A

External economies of scale involve lower unit costs for many/all firms inside the market. The entire LRAC cost shifts downwards.

61
Q

Provide some (4) examples of external economies of scale

A
  • University research departments helping to fund research.
  • Transport networks lower logistics costs
  • Relocation of suppliers of the geographical area or production
  • influx of human capital and highly skilled workers
62
Q

What type of internal issues might a firm facing diseconomies of scale see?

A
  • a business moved beyond their optimum size
  • Businesses are suffering from productive inefficiently because of organisational sack
  • Breakdowns in communication may lead to the departure of highly skilled workers from a business
  • Worker morale can suffer which then reduces productivity and increases unit costs. Higher units costs will reduce total profits. Businesses may then have to raise prices to cover increased costs
  • Lost competitiveness could lead to declining market share and a fall in the share price if the business is listed on the stock market
63
Q

What type of external diseconomies of scale might a firm experience?

A
  • higher regulatory costs for bigger businesses
  • office politics and industrial relations
  • risk aversion among salaried staff
  • waste/inefficiency
64
Q

Explain why the LRATC shift downwards with external diseconomies of scale?

A

Industry may grow at a pace that wages and the prices of its raw materials may be forced upwards owing to their relative scarcity and pressure may be put on local infrastructure. The growth of the industry would then shift the LRATC upward.

65
Q

Explain issues with coordination and control as internal diseconomies of scale

A

As firms become larger, it becomes difficult to monitor what all resources are doing and how they are deployed. This is likely to lead to increased wastage and loss of quality, leading to increased costs.

66
Q

Explain how communication issues lead to internal diseconomies of scale

A

As a firm grows in size, particularly if it is multinational company in different time zones, it cam become difficult to communicate efficiently with all offices and staff, leading to ineffective decision making and delays in action.

67
Q

Why might motivation become an issue that leads to diseconomies of scale?

A

Management theory suggests that employees in large firms may develop a sense of insignificance, alienation and loss of moral leading to lack of motivation and productivity

68
Q

What is the MES?

A

Lowest level of output at which average total costs of production are minimised.

69
Q

True or false? MES is low in a natural monopoly

A

False. MES is likely to be high in a natural monopoly, which means that the industry will be highly concentrated. It is effectively a high barrier to entry

70
Q

Why is the MES likely to be high in highly concentrated markets?

A

Typically, the MES is high in highly concentrated markets - this is because a high MES is effectively a high barrier to entry, preventing new firms from easily joining a particular industry.

71
Q

Why might a business have a high minimum efficient scale?

A
  1. Fixed costs of setting up production are large e.g. in pharmaceuticals where it can be incredibly expensive to bring a new drug to market because of research and testing costs.
  2. Marginal cost of supplying to extra consumers is low relative to fixed costs. For example, many digital businesses grow rapidly because the marginal cost of adding one extra user to the network is very low. They can benefit from network economies of scale
  3. With a natural monopoly, LRAC may continue to fall across the entire range of output which means that the MES is a very high percentage of total market demand. Thus, there might be room for only one firm to fully exploit EofS.
72
Q

Examples of firms with high MES

A
  • Water, gas and electricity supply
  • Underground transport systems
  • Social networks and search engines
73
Q

Examples of firms with low MES

A
  • Cafés and coffee shops in a large city
  • Hotels
  • Dry cleaners
74
Q

What is revenue - definition and equation?

A

Revenue is the income generated from the sale of goods and services. TR= price (p) x quantity (q)

75
Q

How is average revenue calculated?

A

Average revenue (AR) = total revenue (TR) / quantity (Q)

76
Q

Average revenue is the same as…..

Hint: think about the equation

A

Average revenue is the same as PRICE: AR=TR/Q => P X Q/Q = P

77
Q

What is marginal revenue …. Definition and equation?

A

Marginal revenue (MR) is the addition to a firm’s total revenue from selling an additional unit of output.
Marginal revenue (MR) = change in total revenue/change in output

78
Q

Price elasticity of demand along a straight-line demand curve will vary. At high prices, a fall in price will have an ___ demand response - i.e. cutting prices causes total revenue to rise

A

Price elasticity of demand along a straight-line demand curve will vary. At high prices, a fall in price will have an ELASTIC demand response - i.e. cutting prices causes total revenue to rise

79
Q

Demand is price ____ at the bottom of the demand curve - i.e. a fall in price causes total revenue to drop.

A

Demand is price INELASTIC at the bottom of the demand curve - i.e. a fall in price causes total revenue to drop.

80
Q

The factors that will increase or decrease demand (shift demand left and right) will affect AR since AR is the same as demand. What factors will shift AR?

A

PASIFIC
Population
Advertising
Substitute’s price
Income
Fashion/Tastes
Interest Rates
Complement’s price

81
Q

What is profit?

A

Profit is the difference between total revenue and total costs. In other words, Total profit = total revenue - total costs

82
Q

What is normal profit ?

A

The minimum level of profit needed to keep factor inputs in their current use in the long run.

83
Q

What is supernormal profit?

A

Supernormal profits is profit achieved in excess of normal profit. Profit when AR > AC

84
Q

What is subnormal profits?

A

Subnormal profits is when profits are less than normal profits. AR < AC

85
Q

Where can we find the profit maximising output?

A

Where MC = MR

Micro Y2 (8 decks)

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