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
