production and productivity

Question 1

Production:

Answer 1

Production: the total output of goods and services produced by an individual, firm or country.

Question 2

Productivity:

Answer 2

Productivity: a measurement of the rate of production by one or more factors of production.

Question 3

measuring productivity:

Answer 3

total output per period of time/ number of units of FoPs

Question 4

measuring labour productivity:

Answer 4

total output per period of time/ number of units of labour

Question 5

Labour Productivity

Answer 5

Labour productivity: output per worker per unit of time.

Question 6

improving labour productivity

Answer 6

• more and better education and training
• increased motivation.
• advances in technology, leading to workers being equipped with the latest capital equipment, can also lead to increased labour productivity.
• Specialisation and division of labour also facilitate more effective use of specialist capital equipment, which can lead to further increases in labour productivity.

Question 7

Specialisation

Answer 7

Specialisation involves an individual worker, firm, region or country producing a limited range of goods or services

Question 8

Division of labour

Answer 8

Specialisation at the level of the individual worker is referred to as the division of labour.

Question 9

The benefits of specialisation and division of labour

Answer 9

• Repetition of a limited range of activities can increase skill and aptitude, leading to a worker becoming an expert, e.g. a neurosurgeon.
• Reduced time spent moving between different tasks or workstations means increased productivity.
• As tasks are broken up into smaller ones, it becomes efficient to use specialist machinery.
• Division of labour allows people to work to their natural strengths, for example physical strength, technical skill or the ability to communicate.

Question 10

Short run:

Answer 10

Short run: a period of time in which the availability of at least one factor of production is fixed.

Question 11

Long run:

Answer 11

Long run: a period of time over which all factors of production can be varied.

Question 12

Fixed costs:

Answer 12

Fixed costs: costs of production that do not vary with the level of output in the short run.

Question 13

why does AFC slope down

Answer 13

Average fixed costs (AFC), however, fall as output increases because the firm is able to spread the fixed costs over an increasing volume of output. This is a key incentive for firms to increase their output.

Question 14

AFC formula

Answer 14

total fixed costs/output

Question 15

Variable costs:

Answer 15

Variable costs: costs of production that vary with the level of output.

Question 16

Variable cost examples:

Answer 16

• raw materials
• packaging
• wages of casual staff
• fuel for delivery vehicles * distribution costs

Question 17

fixed cost examples:

Answer 17

• rents on business premises
• buildings insurance
• quarterly heating and lighting bills
• salaries of senior staff
• annual marketing and advertising budget

Question 18

describe the shape of the AVC curve

Answer 18

average variable costs (AVC) initially fall in the short run, but begin to rise at higher levels of output as more units of factors of production (probably labour) begin to overcrowd fixed factors of production. This leads to bottlenecks and disruptions to production.

A good analogy here is a busy restaurant kitchen that becomes overcrowded with chefs and other staff; employees get in each other’s way, leading to increased wastage and reduced productivity.

Question 19

AVC formula

Answer 19

total variable costs/output

Question 20

total costs formula:

Answer 20

TC = TFC + TVC

Question 21

total costs:

Answer 21

Total cost: the addition of fixed costs and variable costs at a given level of output.

Question 22

average total costs:

Answer 22

Average total cost: total costs of production divided by the number of units of output.

Question 23

ATC formula 1:

Answer 23

TC / output

Question 24

ATC formula 2:

Answer 24

ATC = AFC + AVC

Question 24

Marginal Cost:

Answer 24

Marginal cost: the addition to a firm’s total costs from making an additional unit of output.

Question 25

The law of diminishing returns:

Answer 25

The law of diminishing returns: when additional units of variable factors of production are added to a fixed factor, marginal output or product will eventually decrease.

This concept can be explained easily if we take a fairly simple example of a busy restaurant kitchen, as additional chefs are employed over a busy period. In the short run the chefs (labour) are the variable factor, while the fixed factor is assumed to be the kitchen (capital). As increasing numbers of customer orders come in, the first few workers are likely to contribute increasing returns in the form of increasing productivity as they work effectively together as a team. They benefit from increased specialisation and division of labour, e.g. chefs focusing on a limited range of tasks such as sauces or desserts, and little time is lost from chefs moving between different types of task.
However, as the kitchen becomes busier and more chefs are employed, the chefs may begin to get in each other’s way, leading to reduced productivity as more mistakes occur. This is the law of diminishing returns in action.

SR concept!!!

Question 26

Returns to scale:

Answer 26

Returns to scale: the relationship between increases in the quantity of a firm’s inputs and the proportional change in output.

Question 27

Increasing returns to scale:

Answer 27

Increasing returns to scale: where an increase in the quantity of a firm’s inputs leads to a proportionally greater change in output.

Question 28

Constant returns to scale:

Answer 28

Constant returns to scale: where an increase in the quantity of a firm’s inputs leads to a proportionally identical change in output.

Question 29

Decreasing returns to scale:

Answer 29

Decreasing returns to scale: where an increase in the quantity of a firm’s inputs leads to a proportionally lower change in output.

Question 30

Economies of scale:

Answer 30

Economies of scale: the reduced average total costs that firms experience by increasing output in the long run.

These cost reductions reflect improvements in productive efficiency. They may give a firm a competitive advantage in the market in which it operates by enabling it to pass on lower prices to consumers and/or generating higher profits that might be re-invested or passed on to shareholders.

Question 31

Internal economies of scale:

Answer 31

Internal economies of scale: reductions in long-run average total costs arising from growth of the firm.

Question 32

types of internal EoS

Answer 32

• Financial economies of scale. The larger and more reputable a firm is, the more likely it is that banks and other lenders will deem it credit-worthy and a
  less risky recipient of loan funds. This will lead to it being offered cheaper loans with lower rates of interest, which reduce its costs. On the other hand, smaller, less well-known firms tend not to be able to access the cheapest costs of borrowing, as they are perceived to be more risky. Purchasing economies, where larger firms can take advantage of bulk-buying discounts, are another example of financial economies of scale. This means that firms such as the large supermarkets can exert significant buying power when purchasing groceries from suppliers that a smaller, convenience store cannot do.
• Technical economies of scale. Larger businesses can generally afford the latest, specialist capital equipment, which is often very expensive. For example, the world’s biggest car manufacturing firms such as Toyota and the Volkswagen Group have the financial resources to invest in bespoke assembly lines that increase productivity and reduce average costs of production. A smaller manufacturer such as Aston Martin would not find it cost effective to invest in such technology, so its unit costs are likely to be higher.
• Marketing economies of scale. Larger firms are likely to have huge advertising budgets, for example Marks and Spencer’s typically lavish TV marketing campaigns around Christmas. However, because of the large volume of sales made by Marks and Spencer, the firm can spread this budget over a larger output than a smaller retailer. This can give larger firms a significant competitive advantage.
• Managerial economies of scale. Larger firms can afford to recruit the highest-profile chief executive officers (CEOs) who tend to attract substantial salaries but also tend to be the most effective in increasing profits through a combination of increasing revenues and reducing costs. Furthermore, larger firms can take greater advantage of the division of labour. Large financial services firms, such as PwC, can afford to have specialist managers in areas such as audit, tax and corporate finance, leading to increased productivity and competitive advantage in these areas. A smaller firm of accountants may be forced to provide a more general service, relying on personal service as a source of competitive advantage rather than cost efficiency.

Question 33

External economies of scale:

Answer 33

External economies of scale: reductions in long-run average total costs arising from growth of the industry in which a firm operates.

Question 34

Diseconomies of scale:

Answer 34

Diseconomies of scale: increases in average total costs that firms may experience by increasing output in the long run.

Question 35

Minimum efficient scale (MES):

Answer 35

Minimum efficient scale (MES): the lowest level of output at which average total costs of production are minimised.

The significance of the MES is that in industries where the MES occurs at a large scale of output, only large firms will be able to achieve this. Once achieved, this can act as a significant barrier to entry for any potential new competitors in an industry, leading to the dominance of one or a small number of powerful firms.

Question 36

Total revenue:

Answer 36

Total revenue: the money a firm receives from selling its output, calculated by price x quantity sold.

Question 37

AR formula:

Answer 37

TR / Q

Question 38

Marginal revenue:

Answer 38

Marginal revenue: the addition to a firm’s total revenue from selling an additional unit of output.

Question 39

MR (formula)

Answer 39

change in TR / change in output