2.6 Production Flashcards
n • explain the role of producers, including individuals, firms and the government • evaluate the importance of production and productivity for the economy • calculate and explain total cost, average cost, total revenue, average revenue, profit and loss • evaluate the importance of cost, revenue, profit and loss for producers, including how costs and revenues affect profit and supply • explain what is meant by economies of scale (21 cards)
What does the term ‘production’ mean?
The total output produced by a firm or industry in a time period.
What does the term ‘profit’ mean?
The difference between the revenue received from the sale of a good or service and the costs involved in making and/or selling the good, including any opportunity costs.
What is an increase in production likely to bring about?
- increase in employment
- increase in profits for firms and the industry
- larger economies of scale
- increase in market share
- economic growth for the economy
- rise in the standard of living
What does the term ‘productivity’ mean?
One measure of the degree of efficiency in the use of factors of production in the production process. It is measured in terms of output per unit of input.
How to calculate productivity?
total input
What is the advantage of high productivity for individuals?
- higher wages
- increase standard of living
What is the advantage of high productivity for firms?
- Lower average costs
- Increasing economies of scale
- More competitive
- Greater profits
What is the advantage of high productivity for the government?
- Greater employment
- Higher wages
- Greater tax revenue
- Greater exports due to competition
- Economic growth
What are the costs of productivity?
- If capital replaces labour it can increase unemployment
- Greater international competitiveness can lead to retaliation and a fall in GDP
How can producers increase productivity?
- Workers specialising
- Investment in new technology and capital
- Improving workers skills with training
What does the term ‘total costs’ mean?
All the costs (total fixed and variable costs) of the firm added together.
What does the term ‘average cost’ mean and how to calculate it?
The cost of producing a unit (unit cost of production).
quantity
What does the term ‘total revenue’ mean and how to calculate it?
The total income of a firm from the sale of its goods and services.
Total Revenue = Price x Quantity
What does the term ‘average revenue’ mean and how to calculate it?
The revenue per unit sold.
quantity
Average Revenue = Price
What does the term ‘profit’ mean?
When a firm’s revenue is more than its costs. TR > TC
What does the term ‘loss’ mean?
When a firm’s revenue is less than its costs. TR < TC
Why is revenue important for producers?
- Encourages investors to invest more money into the firm
- Ability to secure loans and favourable interest rates on overdrafts
- Creates confidence in the firm from workers, supplier & partners
What is the importance of profit for producers in a market economy?
- Generates finance for investment
- Signals to other firms there is a profit to be made in this market
- Attracts more resources to the firm or industry
What does the term ‘economies of scale’ mean?
The cost advantages a firm can gain by increasing the scale of production, leading to a fall in average costs.
What does the term ‘internal economies of scale’ mean and some examples?
A result of the growth of the firm itself, leading to cost savings and resulting in a fall in average costs, e.g.
- Technical economies
- Economies of increased dimensions
- Purchasing or bulk-buying economies
- Division of labour
- Financial economies
- Managerial economies
- Marketing economies
- Risk-bearing economies
- Research and development economies
What does the term ‘external economies of scale’ mean and some examples?
Those that a firm benefits from as a member of an industry or because of its location, e.g.
- Improvement in transport links
- Education and training facilities
- Concentration of firms
- Location
