4 - Production, Cost and Revenue Flashcards
What are the factors of production?
Inputs into the production process, such as land, labour, capital and enterprise
What is land, labour, capital and enterprise?
Land - the actual earth crust
Labour - includes all people employed by the firm who are paid wages.
Capital - warehouses, vehicles, machinery
Enterprise - the entrepreneurs that decide what to make and how to make it. Also decided how much of each factor of production to employ.
What is the productivity gap?
The difference between labour productivity.
What is productivity?
Output per unit of input.
What is labour productivity?
Output per worker.
What is the importance of labour productivity in the UK?
It is a big problem affecting the UK, ‘productivity puzzle’ the UK labour productivity has not recovered as well from the recession as other countries.
Explanations: inadequate investment in capital goods, relatively low wages.
What is a firm?
Business
What is specialisation?
A worker only performing one task or narrow range of tasks. Also a firm only producing one good or service.
What is the division of labour?
Different workers perform different tasks in the course of producing a good or service.
What are the three main reasons why firms should use specialisation and division of labour to produce goods or services, instead of one worker doing all task?
- A worker will not need to switch between tasks so time will be saved.
- More and better machinery or capital can be employed (from increased funds)
- ‘Practice makes perfect’ argument, workers become more efficient or productive at the task they do repeat again repeatedly. However this can cause Boredom decreasing productivity.
(All will reduce production cost so reduce price for consumers)
Disadvantages of specialisation of labour?
1.Work become repetitive, which could lower motivation of workers, affecting quality and productivity.
2.There could be more structural employment, as skill might not be transferable. As only do one skill.
3. Variety could decrease for the consumers, specialisation of a type of good.
4. Could be a higher worker turnover for firms (people who quit) if people are dissatisfied leading employees leave regularly.
Advantages for specialisation of the labour?
1) Higher output and potentially higher quality, proactive makes perfect, and workers will not switch between tasks.
2) More opportunities for economies of scale, Encourages investment in specific capital – economies of scale
3) More competition and this gives incentives for for s to lower their costs, which helps keeps prices down. Lower unit costs leading to higher profits
What is trade?
Buying and selling of goods/services.
What is exchange?
Give something in return for something else received, money is a medium of exchange.
Why do countries specialise in certain production?
For example with Norway they have lots of oil, so they can trade this good to other countries to get the goods and services they are not able to produce.
What is a comparative advantage?
Countries can produces a good at a lower opportunity cost to another.
(Produce a good relatively cheaper than other countries)
What are the advantages of comparative advantage?
- Increased supply of stock, so greater world output and economic welfare.
- Outward shift in the PPF curve.
- Lower average cost since the market becomees competitive markets.
What are the disadvantages of comparative advantage for countries?
Countries become dependent, so for example if this is wheat if there is a bad season then their economy will suffer.
Why was a medium of exchange required?
Transaction used to be conducted through bartering and trading of products such as wheat. But people were not able to get exactly what they wanted. Because goods and services were not always the same value, and could only take place if there was double coincidence of wants, so both parties wanted to trade.
Why money a good medium of exchange?
Provides a means to measure the value of different goods, services and also labour.
What must money do though to be a good medium for exchange?
Hold its value.
It can then be kept for a long time without expiring.
Also allows people to be able to go into debt, and being able to pay the money back later.
What is the difference between the short run and the long run?
In the short run at least one of the factor of production are fixed and in the long run all factors of production are variable.
What is the marginal returns of labour?
The change in the quantity of total output resulting from the employment of one more worker, holding all the other factors of production fixed.
Explain the law of diminishing returns.
Diminishing returns occur in the short run when one factor is fixed (e.g. capital)
If the variable factor of production is increased (e.g. labour), there comes a point where it will become less productive and therefore there will eventually be a, so the marginal return of the labour falls.
This is because, if capital is fixed, extra workers will eventually get in each other’s way as they attempt to increase production. For example, think about the effectiveness of extra workers in a small café. If more workers are employed, production could increase but more and more slowly.
An extra unit of labour adds less to the total output than the unit of labour before.
Therefore, total output still rises, but it increases at a slower rate.
What is the law of diminishing marginal returns?
At a certain point, employing an additional factor of production causes a relatively smaller increase in output.
What is the total returns?
The whole output produced by all the factors of production, including labour, employed by a firm.
What is the average returns of labour?
Total output divided by the total number of workers employed.
Output per worker over time.
Use an example to explain the marginal return?
(Could be any factor of production usually labour)
For labour, an example would be employing more staff in a small shop will make it overcrowded and the extra output per unit of labour falls.
What does Returns to Scale mean?
Return to scale refers to the rate by which output changes if the scale of all the factors of production is changed.
Explain the returns to scale for a plant using this diagram.
(plant = establishment (factory/workshop), owned by a firm)
Say that the firm fixed capital is a plant.
Initially in the short run the plant can increase production in the short run along A by employing more labour but eventually short-run diminishing marginal returns will set in.
In the long run they may expand the size of the workshop to workshop 2.
However once this workshop is operational then the firm will be in a new short-run situation, again increasing output until the short-run diminishing returns set in again.
What does the increasing returns to scale mean?
When the scale of all the factors of production employed increases then output increases at a FASTER rate.
What does the constant returns to scale mean?
When the scale of all the factors of production employed increases then output increases at the SAME rate.
What does the decreasing returns to scale mean?
When the scale of all the factors of production employed increases then output increases at a SLOWER rate.
a) At what level of output do diminishing marginal returns to labour set in?
b) At what level of output do diminishing average returns to labour set in?
c) At what level of output do diminishing total returns to labour set in?
How can you show the law of diminishing demands on a diagram?
A
Explain how the have worked out the average return maximum and marginal returns maximum.
Average return = total output of labour / number of labour employed
6 is the maximum out of labour before it begins to fall from 7 and onwards.
Marginal return = total return of (n) - total return of (n - 1)
MR of (5) = 50 - 32 = 18
5 is the maximum as after this the marginal return begins to fall.
What does the short run average total cost curve look like?
Explain this diagram.
The short run average total cost curve is U shaped due to diminishing returns.
This is because the factors of production are fixed. At one point, employing more resources will be less productive, which means the marginal output decreases per extra factor of production. And marginal costs start to increase.
Draw the Long Run Average Cost Curve.
Explain the Long Run Average Cost diagram.
- Initially, average costs fall, since firms can take advantage of economies of scale. This means average costs are falling as output increases.
- After the optimum level of output, where the average costs are at their lowest, average costs rise due to diseconomies of scale.
Show how the relationship between economies of scale and diseconomies of scale on the shape of the long-run average cost curve.
Initially, average costs fall, since firms can take advantage of economies of scale. This means average costs are falling as output increases.
After the optimum level of output, where average costs are at their lowest, average costs rise due to diseconomies of scale.
The point of lowest LRAC is the MINIMUM EFFICIENT SCAKE. This is where the optimum level of output is since costs are lowest, and the economies of scale of production have been fully utilised.
Draw out the L-shaped LRAC curve. (Hint - Uses SRAC aswell)
Explain this L-shaped LRAC curve.
The diagram above shows the relationship between the SRAC curve and the LRAC curve. The LRAC curve envelopes the SRAC curve, and it is always equal to or below the SRAC curve. The LRAC curve shifts when there are external economies of scale, i.e. when an industry grows.
SRAC falls at first, and then rises, due to diminishing returns. In the long run, costs change due to economies and diseconomies of scale.
If SRAC = LRAC, the firm operates where it can vary all factor inputs.
The L-shape curve is a development in cost theory from the traditional U-shaped curve. It suggests that to begin with, costs per unit fall as output increases, due to economies of scale.
Even if there are diseconomies of scale within the firm, such as if managerial costs increase, they are offset by the economies of scale gained by technical or production factors.
This means that in the long run, costs continue to fall, even if the pace of falling output costs slows (shown by the flat part of the curve)
Explain the concept of the minimum efficient scale of production and where it is on the L-shaped long-run average cost curve.
MES is the lowest output at which the long-run average costs has been reduced to the minimum level that can be achieved, which means the firms has benefited to the full from economies of scale.
Draw out the Average Revenue and the firms demand curve.
Why is the average revenue curve is the firms demand curve?
The AR curve is the firms demand curve. This is because the average revenue curve is the price of the good.
In markets where firms are price takers, the AR curve is horizontal. This shows the perfectly elastic demand for their goods.
Profit is the difference between TR and total costs. It is the reward entrepreneurs receive from taking risks.
a) marginal revenue when output per week increases from 4 to 5 units.
b) the level of output at which the firm would make the normal profit but not abnormal profit.
c) the profit-maximising level of output per week.
