Unit 4 - Production, Costs and Revenue Flashcards
Production
Converts inputs or factor services into outputs of goods and services.
Factors of production
Inputs into the production process, such as, land, labour, capital and enterprise
Productivity gap
The difference between labour productivity, e.g in the UK and in other economies
Productivity
Output per unit of input
Labour productivity
Output per worker
Capital productivity
Output per unit of capital
Firm
A productive organisation which sells its output of goods/services commercially
Specialisation
A worker only performing one task or a borrow range of tasks. Also, different firms specialising in producing different goods or services
Division of labour
This concept goes hand in hand with specialisation. Different workers perform different tasks in the course of producing a good or service
Trade
The buying and selling of goods and/or services
Exchange
To give something in return for something else received. Money is a medium of exchange
Marginal returns of labour
The change in the quantity of total output resulting from the employment of one more worker, holding all other factors of production fixed.
Law of diminishing marginal returns (also known as law of diminishing marginal productivity)
A short term law which states that as a variable factor of production is added to a fixed factor of production, both the marginal and eventually the average returns to the variable factor will begin to fall
Total returns
The whole output produced by all the factors of production, including labour, employed by a firm
Average returns of labour
Total output divided by the total number of workers employed
Returns to scale
The rate by which output change last if the scale of all the factors of production is changed
Plant
An establishment, such as a factory, a workshop or a retail outlet, owned and operated by a firm.
Increasing returns to scale
When all the scale of the factors of production employed increases, output increases at a faster rate
Constant returns to scale
When all the scale of all the factors of production employed increases, output increases at the same rate.
Decreasing rate to scale
When the scale of all the factors of production employed increases, output increases at a slower rate.
Fixed cost
Cost of production which, in the short run, does not change with output
Variable cost
Cost of production which changes with the amount that is produced, even in the short run.
Average fixed cost
Total cost of employing the fixed factors of production to produce a particular level of output, divided by the size of output: AFC = TFC \ Q
Average total cost (also known as average cost)
Total cost of producing a particular level of output, divided by the size of the output: ATC = AFC + AVC
Economies of scale
As output increases, long-run average costs fall.
Diseconomies of scale
As output increases, long-run average costs rises.
Internal economies and diseconomies of scale
Changes in long-run average cost of production resulting from changes in the size or scale of a firm or plant.
External economy of scale
A fall in the long-run average costs of production resulting from the growth of the market or industry of which the firm is a part.
External diseconomy of scale
An increase in long-run average costs of production resulting from the growth of the market or industry of which the firm is a part.
Total revenue
All the money received by a firm from selling its total output.
Average revenue
Total revenue divided by output
Marginal revenue
Addition to total revenue resulting from the sale of one more unit of the product.
Monopoly
One firm only in a market
Perfect competition
A market that displays the six conditions of:
-A large number of buyers and sellers
-Perfect market information
-The ability to buy or sell as much is desired at the ruling market price
-The inability of an individual buyer or seller to influence the market price
- A uniform or homogenous product
-No entry or exit in the long run
Price-taker
A firm which is so small that it has to accept the ruling market price. If the firm raises its price, it loses all of its sales ; if it cuts its price, it gains no advantage.
Price- maker
When a firm faces a downward-sloping demand curve for its product, it possess the market power to set the price at which it sells the product.
Quantity-setter
When a firm faces a downward-sloping demand curve for its product, it possess the market power to set the quantity of the good it wishes to sell
Profit
The difference between total sales revenue and total cost of production.
Profit maximisation
Occurs at the level of output at which total profit is greatest.
Normal profit
The minimum profit a firm must make to stay in business l, which is l, however, insufficient to attract new firms into the market.
Abnormal profit (also known as supernormal profit and above normal profit)
Profit over and above normal profit.
Technological change
A term used to describe the overall effect of invention, innovation and the diffusion or spread of technology in the economy.
Invention
Making something entirely new; something that did not exist before at all.
Innovation
Improves on or makes a significant contribution to something that has already been invented, thereby turning the results of invention into a product
Productive efficiency
For the economy as a whole occurs when it is impossible to produce more of one good without producing less of another. For a firm it occurs when the average total cost of production is minimised.
Dynamic efficiency
Measures improvements in productive efficiency that occur in the long run over time.
Duopoly
Two firms only in a market
Monopolistic competition
a market structure in which firms have many competitors, but each one sells a slightly different product.
Creative destruction
Capitalism evolving and renewing itself over time through new technologies and innovations replacing older technologies and innovations.
