Unit 2: Production Choices Flashcards
Consumer demand plays major role in determining
Market price and total sales– both are factors that determine revenue
Both ___ and ____ are important to a firm
Productivity and efficiency
Most common measure of productivity
Output per worker
Firms can’t control revenue instead they focus on
controliling costs of production
- Firm that can make the desires product at the lowest price possible has the best chance of maximizing profits
Measures of efficiency:
- Cost per unit
- Unit labour cost
When a firm improves its productivity and not costs
It can produce more goods/services for the same costs
Cost per unit:
Takes into account all costs entailed in creating a product.
Unit labour cost:
Only measures cost of labour involved in making one unit
Firm or economy become more efficient when its productivity is increasing faster than its;
costs of production
MAKING PRODUCTION CHOICES
1) CONTROLLING COSTS OF PRODUCTION
- Increasing productivity/efficiency are important, as firm can’t control revenue (in hands of consumer demand)
- Controlling cost per unit/unit labour costs increases competitveness by increasing efficiency of a firm WITHOUT increasing production costs
2) CHOOSING PRODUCTION METHODS
- Firms will choose methods of productions that that make goods/services and keep costs to a minimum
- Labour intensive, capital intensive (most beneficial for mass production/lower cost per unit thus– increasing productivity/efficiency), cottage system,
Labour-intensive:
Most work is conducted by hand
Cottage System:
Cottage system made economic sense because it was the most efficient way to produce
- In cottage system, labour was plentiful/cheap, and market was usually a small local one. Most costs of production were variable and could easily be adjusted to meet newdemand. Fixed costs were extremely low.
Capital intensive:
Capital investment in buildings/machinery made the labour force more productive and the production process more efficient.
- Has high fixed costs and lower variable costs
Economies of scale
Greater efficiency that some firms can achieve when they produce a very large amount of output.
- Some firms may become less efficient owing to the law of diminishing returns
- Others may see cost per unit drop as output increases
- Large firms have more market power to negotiate better prices with suppliers
Drawback of switching to capital-intensive production
Sharp increase in fixed costs relative to variable costs
- Difficult to increase production in a boom, and decrease costs in bad times
Increasing output allows a firm to spread its fixed costs over
The incresaing number of units produced– this rapidly reduces cost per unit
Firms in private sector largely determine the economic eqn of “How do we produce?”
in a market economy
- Resources must be blended/organized to avoid diminishing returns and maximize productivity at lowest possible cost
Consumers play major role in determining
Market price/total sales
Productivity:
Maximizing output from resources used, and efficiency: producing at the lowest possible cost
Efficiency:
Producing at the lowest possible cost, are of importance to the firm.
Productivity is measured based on output per worker. Factors affecting productivity:
skills, education, and experience of the workforce are important.
- And quality/quantity of resources with which labour works
When a firm improves productivity (not costs), it can produce more goods/services for the same costs.
Consequently: firms can offer product or service at a lower price, making it competitive with other firms.
