Unit 4: Production Costs And Revenue

Question 1

If a firm has high fixed costs, how much output would they need to produce to minimise average costs?

Answer 1

A high amount

Question 2

Define economies of scale:

Answer 2

When increasing output leads to lower long-run average costs. It means that as firms increase in size, they become more efficient.

Question 3

What does TP mean?

Answer 3

Total Product- total output produced by workers.

Question 4

What does MP mean?

Answer 4

Marginal product- the output produced by an extra worker.

Question 5

Diminishing returns definition:

Answer 5

The decrease in marginal output of a production process as the amount of a single factor of production is incrementally increased, holding all other factors of production equal.

Question 6

Equation for revenue:

Answer 6

Revenue= price X quantity

Question 7

Revenue definition:

Answer 7

Income or turnover generated by sales of a product

Question 8

Equation for average revenue (different to equation for revenue):

Answer 8

Average Revenue= Total Revenue ➗quantity sold (since this (pXq) ➗ q, average revenue is price)

Question 9

Equation for profit:

Answer 9

Profit = Total Revenue- Total Cost

Question 10

Profit definition:

Answer 10

The difference between a firm’s revenues from it’s trading activities and it’s total costs. It’s a reward for risk and a return on capital invested.

Question 11

Equation for total cost:

Answer 11

Total cost= fixed cost + variable cost

Question 12

Total cost definition:

Answer 12

The entire expenses of production of a firm.

Question 13

Equation for average cost (unit cost):

Answer 13

Average cost (unit cost) = Total cost ➗ quantity produced

Question 14

Unit cost definition:

Answer 14

Average cost of producing one unit.

Question 15

Name the three ways to calculate labour productivity:

Answer 15

. Output per employee.
. Unit labour cost.
. National productivity.

Question 16

Equation for output per employee:

Answer 16

Output per employee = Total value of output ➗ total number of employees

Question 17

Output per employee definition:

Answer 17

Value of output the average worker produces.

Question 18

Equation for unit labour cost:

Answer 18

Unit labour cost = Total labour costs ➗ Quantity produced

Question 19

What do lower unit labour costs cause?

Answer 19

Higher productivity that will increase the value of output and reduce the cost of making each item.

Question 20

Equation for U.K. productivity:

Answer 20

U.K. productivity= Total U.K. output (GDP) ➗ Total U.K. hours worked

Question 21

National productivity definition (and what it can be used for):

Answer 21

It is a measure of the output per worker in a given time period. High productivity is better. Can be used to compare productivity of all U.K. firms against international rivals.

Question 22

How do you draw and label a diagram, showing short and long run cost curves?

Answer 22

. X-axis: Quantity. Y-axis: Average Cost.
. 1 U-shaped ‘LRAC’ curve (starts steep then goes flat then gets a only a bit steeper).
. 5 U-shaped ‘SRAC 1’ to ‘SRAC 5’ (from left to right) curves that all lie on ‘LRAC’ curve (they start steep and end steep and all these SRAC curves overlap each other).

Question 23

How do you draw and label a diagram, showing law of diminishing returns?

Answer 23

. 2 diagrams directly on top of each other.
. X-axis for both: ‘Variable input’.
. Top diagram: Y-axis: Total output.
- +ve g ‘Total product’ s-shaped curve that starts off steep from origin then gets steeper then finishes more flat.
. Bottom diagram: y-axis: Marginal product.
- n-shaped ‘Marginal product curve’ that starts steep then quickly goes flat then gets steeper then stops.
. Point where ‘TP’ curve stops getting steeper lines up with point where ‘MP’ curve goes flat.
- this point is represented by vertical line going from this point on ‘TP’ curve to x-axis on bottom diagram.
. Remember that gradient of TP curve is equivalent to y-value of MP curve.

Question 24

How do you draw and label a diagram, showing the LRAC for economies of scale then diseconomies of scale?

Answer 24

. X-axis: ‘output’. Y-axis: ‘average cost’.
. Large U-shaped ‘Long run average cost’ curve.
. Vertical line (labeled ‘Minimum efficient scale’ on x-axis) that goes through flat part of LRAC curve.
. Horizontal line (labeled ‘Minimum average cost’ on y-axis) that is in line with flat part of LRAC curve.
. Horizontal arrow labelled ‘Economies of scale’ that points to the right and is between x-axis and vertical line.
. Horizontal arrow labelled ‘Diseconomies of scale’ that points to the right and is to the right of vertical line.