4.1.4 Production, costs and revenue

Question 1

What is ‘production’?

Answer 1

The process of converting inputs (factors of production) into outputs

Question 2

What is ‘productivity’?

Answer 2

The ouput per factor employed

Question 3

How do you calculate labour productivity?

Answer 3

Total output per unit of time / number of units of labour

Question 4

What is specialisation?

Answer 4

When a worker, firm, region or country focuses on the production of a particular range of goods/services.

Question 5

What is division of labour?

Answer 5

A form of specialisation, where production is split into different tasks for different individuals/ groups.

Question 6

What are 2 advantages and disadvantages of specialisation?

Answer 6

Advantages:
- Improves labour productivity as it leads to higher quality and quantity
- Leads to EOS, with greater size means greater division of labour I.E the production line

Disadvantages:
-Psycological effects on workers due to repetition
-Lack of flexibility, no transferable skills
-Economies that specialise and become reliant on trade are less self-sufficient and more vunerable

Question 7

How does specialisation relate to money as a medium of exchange?

Answer 7

Specialisation makes exchange/trade vital for economic parties, from firms to entire nations, as they will rely on this to acquire goods which they no longer produce themselves.

Question 8

What is the difference between the short run and the long run?

Answer 8

Short run = A period of time where at least one factor of production is fixed.
Long run = A period of time where all factors of production are variable.

Question 9

What is total revenue/returns?

Answer 9

Amount of output sold X price of each output

Question 10

What is average returns?

Answer 10

Total revenue / total quantity sold

Question 11

What is marginal returns?

Answer 11

The increase in total revenue by selling one extra unit of output

Question 12

What is the law of diminishing returns?

Answer 12

The law of diminishing returns states that in the short run, as variable factors of production are ADDED to the fixed factors of production, total/marginal output will initially rise and then fall.
The variable factor is assumed to be labour and the fixed are assumed to be land and capital.

Question 13

Why does the law of diminishing returns occur?

Answer 13

Initially, as more workers are hired, there are productivity improvements as under utilised fixed factos of production are used up and specialisation gains take place meaning MC fall and MP rises. Eventually as more workers are hired the fixed factores of production become a constraint on production therefore Marginal Product begins to fall and Marginal Costs begin to increase.

Question 14

Show the Law of Diminshing returns on a diagram

Answer 14

see flashcard

Question 15

What is the shape of the LRAC curve? Why?

Answer 15

It is shaped like a bowl with a slightly flat centre.

Because of increasing and decreasing returns to scale as a result of economies and diseconomies of scale.

Question 16

What is economies of scale?

Answer 16

A decrease in long run average costs as output rises. When firms benefit from lower average costs of productions as their output rises.

Question 17

What is diseconomies of scale?

Answer 17

An increase in LRAC as output rises. When a firm grows so large that the average costs begin to increase with output.

Question 18

What is meant by the term ‘returns to scale’?

Answer 18

How a firms output changes as its inputs increase or decrease.

Question 19

What are the three types of returns to scale in long run production?

Answer 19

Increasing = Output increases proportionally more than input increases, due to EOS

Constant = Output increase in proportion to input increases, when all EOS are being exploited

Decreasing = When output begins to decrease proportionally less than input, the firm is suffering from diseconomies of scale

Question 20

What is another term for constant returns to scale?

Answer 20

The minimum efficient scale of production (MES)

Question 21

Show LRAC curve, Increasing returns to scale, Constant returns to scale, Decreasing returns to scale, EOS, disEOS and MES on a diagram.

Answer 21

see flashcard

Question 22

Show on a diagram a small firm exploiting smaller EOS and a large firm exploiting full EOS

Answer 22

see flashcard

Question 23

Whats the difference between internal and external EOS?

Answer 23

Internal = Those that occur within the business
External = Those that occur outside of the business

Question 24

What are the 5 types of internal EOS? Name an example for each.
What is the key sentence when explaining how they create EOS?

Answer 24

Fun Mums Try Making Pies

Financial Economies - Negotiating lower interest rates on loans due to having a track history of successful repayments

Marketing Economies - Use size to bulk buy advertising and negotiate lower rates

Technical Economies - Being able to afford highly specialist machinery that is more efficient increasing productivity of capital or improves quality of the good.

Managerial Economies - A large firm can afford to employ specialised managers to improce worker productivity.

Purchasing Economies - Being able to bulk buy raw material / imputs from suppliers and therefore recieving a discount price.

……Output will rise at a greater rate than total costs, reducing unit costs.

Question 25

What are the 3 external EOS?

Answer 25

Transport infrastructure - As the business gets larger this may improve in the locality of the business, reducing costs of production

Material Suppliers move closer to business - Supplies may do this if the business is very large, reducing delivery costs

RnD firms move closer to the business - Business benefits from innovation that can reduce total costs

Question 26

What are the 3 diseconomies of scale?

Answer 26

Communication - So large that messages dont travel easily, reeucing efficiency

Coordination - More staff / layers of management, harder to control as greater time is taken to feed through channels, reducing efficiency

Motivation - Workers feel more alienated and less singificant, decreasing productivity and increasing labour turnover

Question 27

What is the difference between marginal, average and total costs?

Answer 27

Total costs = Fixed costs + Variable costs
Average costs = Total costs / number of units sold (output)
Marginal costs = The cost added by producing one additional unit

Question 28

What is the difference between long run and short run costs?

Answer 28

Short run costs = Those that occur when at least on efactor of production is fixed. Costs can be fixed or variable

Long run costs = Those that occur in the long run, all costs are variable as there are no fixed factors of production

Question 29

Why is the AR curve equal to the demand curve?

Answer 29

Because AR is the price of the good, and demand shows the relationship between price and quantity sold.

Average revenue = Total Revenue / Quantity
Total Revenue = Price X Quantity
Therefore…
AR = Price X Quantity / Quantity = Price (as Q is cancelled out)
AR = Price and Demand = Price

Question 30

What is the relationship between AR and MR?

Answer 30

MR curve is twice as steep as AR curve

Question 31

What is profit?

Answer 31

Total revenue - Total costs

Question 32

What is the difference between normal profit and supernormal profit?

Answer 32

Normal profit = Enough profit to cover all expenses
Supernormal profit = Any profit made above expenses

Question 33

What are the 4 roles of profit in an economy? Explain them.

Answer 33

irbp = It Really Beats Porn

Investment = Profit acts as both an inscentive to invest and a means of investment.
Retained profit - Investment - Furhter improvement of profitability - Dynamic Efficiency - Macro benefits -SR/LR growth - providing jobs - improve international competitiveness.

Reward = Profit rewards risk taking entrepeneurial behaviour and shareholders. Benefits economy as entrepreneurs create jobs, new products, competition etc..and shareholders keep investing their money into business, improving profitability etc..etc.

Benefit Consumers = Profit motivated business aim to minimise costs, increase x efficiency, meet consumers wants and needs, exploit EOS, promote dynamic efficiency….Consumers gain from lower prices, higher consumer surplus and greater quantity and quality.

Price Mechanism = Profit allows the price mech to work as an effective and efficient way of allocating scarce resources. The inscentive function of price means that shortages and surpluses in a free market will not last, given the greater potential profit for producers. The efficient allocation of resources in society depends on a profit motive,

Question 34

What is the difference between invention and innovation?

Answer 34

Invention is creating something completely new, innovation is the process of improving existing creations or finding new uses for them.

Question 35

What can technological change lead to?

Answer 35

-improvements in efficiency and productivity,
which could lower costs of production for firms and improve quality and quantity of goods/services
-development of new products
-creative destruction

Question 36

What is creative destruction?

Answer 36

The idea that new entrepreneurs are innovative, which challenges existing firms. The more productive firms then grow, whilst the least productive are forced to leave the market. This results in an expansion of the economy’s productive potential.

Question 37

How does technological change occur in Monopolies and Oligpolies?

Answer 37

Monopoly = They have no competition therefore are not motivated to innovate. They are often inneficient with higher costs than they could be.

Oligopoly = More inscentive to innovate as they are earning supernormal profits and trying to get ahead of competitors. Technological change occurs quite rapidly in oligpolies.