Yr2 Production, Costs and Revenues Flashcards
PART 1
PRODUCTION AND PRODUCTIVITY
Definition of production?
Converts inputs or factor services into outputs of goods and services
Definition of productivity?
Output per unit of input
Why does productivity matter? (3)
- Governs how fast an economy can grow
- Businesses are able to produce more output with few hours of work
- Limits the upwards pressure on pay and prices as the economy grows
What are two examples of how a country/ government used strategies to improve productivity?
- Italy
- move to a 4 day work week (incr productivity per hour) - UK
- large firms piloting 2022 4 day week
- 89% of firms continuing with policy 1 year on
- 86% of employees said they perform better at work
What makes productivity grow? (4 drivers)
- Increases in the amount of capital per workers
- Improvements in the way a business combines its labour and capital
- How hard a firm works its labour and capital relative to their full capacity
- New ideas and new technology
PART 2
SPECIALISATION, DIVISION OF LABOUR AND EXCHANGE
Definition of specialisation?
A worker only performing one task or a narrow range of tasks. Also, different firms specialising in producing different goods and services
Definition of 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
Advantages of specialisation of labour? (3)
- Higher productivity + efficiency > rising output per person per hour
- Lower unit costs leading to higher profits
- Encourages investment in specific capital > economies of scale
Disadvantages of specialisation of labour? (4)
- Risk of worker alienation
- Risk of disruptions to production process
- High labour turnover
- Risk of structural unemployment due to occupational immobility
PART 3
COSTS OF PRODUCTION
Give some examples of variable costs to a business
- raw materials
- utilities
- security
- shipping
- deliveries
What are some examples of fixed costs to a business?
- rent
- wages
- insurance
- loans
- security
- capital maintenance
What is the definition of fixed costs?
Costs that do not change with output
What is the definition of variable costs?
Costs that change with output
What is the definition of total costs?
The complete cost to a business of producing a good
- variable costs + fixed costs
What is the definition of revenue?
- value of sales made during a trading period
- selling price x no of units
What is the definition of profit?
What is left when costs have been deducted from revenue
Revenue - TC
What is the equation for averages wage?
Revenue / no of units
What does a cost diagram look like and what is on it?
TC, FC, VC
FC - horizontal line
VC - diagonal line starting from the origin
TC - diagonal line starting from 0 units but at the FC
What does the average cost diagram look like?
Negative quadratic
What is the basic shape of marginal costs diagram?
+ what does the diagram display?
Slopes downward for a short amount of time and then slopes upwards for the rest of time
Demonstrates economies of scale
What is different in terms of short run or long run time scales?
Short run
- at least one factor of production is fixed
Long run
- no factors of production are fixed and all factors of production can be varied
PART 4
ECONOMIES AND DISECONOMIES OF SCALE
What is the definition of returns to scale?
How the output of a business responds to a change in factor inputs
What is the way to demonstrate increasing returns?
When % change in output > % change in inputs
What is the way to demonstrate decreasing returns?
When % change in output < % change in inputs
What is the way to demonstrating constant returns?
When % change in output = % change in inputs
What diagram represents economies and diseconomies of scale?
+ what parts represent what + labelling axis
The growth of firms illustration
- negative quadratic shaped
Economies of scale as slopes downwards and diseconomies of scale as slopes upwards
Y axis - cost and revenue
X axis - output
What is the definition of economies of scale?
A proportionate saving in costs gained by an increased level of production
What is the definition of diseconomies of scale?
When the growth of a firm leads to increasing the cost per unit
What is the definition of internal economies of scale?
Cost saving resulting from the growth of the firm itself
What is the definition of external economies of scale?
Cost saving resulting from growth of the industry or market in which the firm operates
What do changes in the returns to scale impact? (In relation to drawing diagrams)
The shape of the businesses average cost curve
What are the 4 key benefits to consumers of EOS?
- Lower prices
- leading to higher real incomes + increased consumer surplus
- emphasis on improved affordability and effective demand for households on below average incomes - Producer surplus has value
- reinvested in capital spending and research and development which might lead to improvements in dynamic efficiency e.g. farming - Consumers as employees
- potential for higher real wages and profit shares e.g. in a business with employee-share schemes - Consumer benefits from network externalities
- e.g.travellers benefitting from more hotels listed on a platform, improved quality of information as more users join a network
NEED TO APPLY THE THEORY
What are the 6 types of economies of scale?
- Technical
- Financial
- Managerial
- Commercial/ marketing
- Risk bearing
- Research and development
What does technical mean as a type of economies of scale?
Produced more efficiently as the scale of production increases e.g. specialization of labour + improved production processes
What does financial mean as a type of economies of scale?
Larger firms have more favourable financing options e.g. lower interest rates on loans
What does managerial mean as a type of economies of scale?
Benefits of having specialized management teams e.g. better coordination + efficient decision making
What does commercial /marketing mean as a type of economies of scale?
Larger firms have more resoruces to allocate towards marketing e.g. decr cost per unit and increased market presence
What does risk-bearing mean as a type of economies of scale?
Larger firms are better equipt to handle unexpected fluctuations and risks, therefore decr cost of risk management
What does research and development mean as a type of economies of scale?
Larger businesses have more income at their disposal so they can make their product more advanced so more people purchase it e.g. apple inventing Face ID
NEED TO EDIT ON GOOD NOTES
What are the 3 types of diseconomies of scale?
- Communication
- Co-ordination
- Cooperation
What does communication mean as a type of diseconomies of scale?
With increased size, there becomes a challenge to communicate, which leads to misunderstandings and errors which incr costs
What does co-ordination mean as a type of diseconomies of scale?
Struggle to maintain effective control and coordination among departments and divisions which leads to inefficiencies
What does cooperation mean as a type of diseconomies of scale?
Workers in large firms may feel a sense of alienation and loss of morale. If they don’t consider themselves an important part of the business, productivity may fall, which leads to higher costs for the business
PART 5
REVENUE
