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Economics > 4.1.4 Production Costs And Revenues > Flashcards

4.1.4 Production Costs And Revenues Flashcards

1
Q

What is the process of production?

A

Converting inputs into outputs

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2
Q

What are the inputs in production?

A

The Factors of Production:
1. Land - natural resource
2. Labour - human resource
3. Capital - man-made resource
4. Enterprise - organisation of other FOP for production to make profit, taking risk

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3
Q

What is productivity?

A

The output per unit of input per time period

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4
Q

What is labour productivity?

A

The output per worker hour

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5
Q

What is the productivity puzzle in the UK?

A

The UK has very low productivity

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6
Q

What are the effects of the UK’s very low productivity?

A
  • Lower average income
  • Lower standard of living
  • More imports & less exports (worse trade balance)
  • Less tax revenue (austerity)
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7
Q

What is specialisation?

A

When individuals/countries focus on one specific task (e.g. within a production process)

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8
Q

What are the benefits of the division of labour?

A

Increased efficiency, leading to lower prices and therefore a higher standard of living

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9
Q

Why do benefits increase efficiency?

A
  • Less time wasted switching tasks
  • Expertise developed in individual tasks
  • Expertise with dedicated capital
  • Easy to learn one task
  • Innovation - workers can identify how to improve
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10
Q

What are the negatives of specialisation?

A
  1. Boredom leading to demotivation
  2. Health issues
  3. Dependent on all workers being present
  4. Workers get limited expertise
  5. One person making mistakes can lead to all product being ruined and/or a high cost of quality control
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11
Q

What else do countries also have to do if they specialise in one product, in order to access other products?

A

Trade

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12
Q

Why do we use money as a ‘medium of exchange’?

A

Trading using barter (exchange of products) requires a ‘coincidence of wants’

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13
Q

What is the short run?

A

The period of time within which at least one FOP is fixed (e.g. capital/land)

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14
Q

What is the long run?

A

The period of time within which all FOP are variable in quantity

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15
Q

What does marginal mean?

A

The addition to the total value (e.g. output) from adding an additional unit of another input

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16
Q

What is the law of diminishing returns?

A

As units of a variable input are added, the marginal output (first rises but) eventually falls

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17
Q

Is diminishing returns short or long run?

A

Short run as at least one FOP is fixed

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18
Q

What is returns to scale?

A

As a firm increases quantity of output, average cost will (first fall but) eventually rise

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19
Q

Is returns to scale short or long run?

A

Long run as all FOP are variable

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20
Q

If the marginal production is greater than 0, what effect does this have on the total production?

A

Total production is rising

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21
Q

When does total production peak?

A

When marginal production = 0

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22
Q

When the marginal production is greater than the average production, what is the average production doing?

A

Average production is rising

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23
Q

At what value of average production does marginal production = average production?

A

The highest value of average production

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24
Q

What value of average cost does marginal cost = average cost?
What is this called?

A

The lowest value of average cost
This is called productive efficiency

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25
Q

What are fixed costs?

A

Costs that do not vary with output and cannot be changed in the short run

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26
Q

What are variable costs?

A

Costs that vary with output and can be changed in the short run

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27
Q

What is the total cost?

A

Fixed costs + variable costs

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28
Q

What is the marginal cost?

A

The addition to total cost from making one more unit of output

29
Q

How is average fixed cost calculated?

A

Fixed cost / quantity

30
Q

How is average variable cost calculated?

A

Variable costs / quantity

31
Q

How is average total cost calculated?

A

Total cost / quantity

32
Q

What is the likely business action if there are low wages levels and high capital costs?

A

Employ more staff and invest less in machines

33
Q

What is the likely business action if labour costs are high and capital is cheap?

A

Invest in capital

34
Q

What is the likely business action if there are high labour costs and high capital costs?

A

Invest in capital

35
Q

What are economies of scale?

A

As output increases, LRAC tends to fall

36
Q

What are diseconomies of scale?

A

As output increases, LRAC often will eventually rise

37
Q

What does an LRAC envelope curve (falling->flat->rising) show?

A

It shows increasing, then constant, then decreasing returns to scale

38
Q

What does a flat LRAC curve show?

A

It shows constant returns to scale e.g. for personal services

39
Q

What does a decreasing LRAC curve show?

A

It shows increasing returns to scale e.g. software/medicines/utilities (electricity/water)
Can be called an L-shaped AC curve
Shows a NATURAL MONOPOLY

40
Q

What are internal economies of scale?

A

As a firm increases output in the long run, average cost decreases

41
Q

What are examples of internal economies of scale?

A
  • Purchasing E of S: bulk buying means a cheaper cost per unit
  • Technological E of S: big firms can buy best tech equipment
  • Marketing E of S: big companies can advertise more effectively/ efficiently
  • Financial E of S: big companies can borrow at lower interest rates and for longer time
  • Managerial E of S: big companies can afford better managers to be more efficient
  • Specialisation E of S: division of labour e.g. on production line
  • Risk bearing E of S: big companies can diversify (AKA economies of scope)
  • Research + development E of S: big companies can devote more funds to research and development
  • Technical E of S: e.g. double dimensions = 4x cost = 8x capacity, also applies for transport/ containerisation
42
Q

What are internal diseconomies of scale?

A

As a firm increases output in the long run, average cost will increase

43
Q

What are examples of internal diseconomies of scale?

A
  • Slow reaction times / lack of flexibility
  • Difficult to coordinate/manage production
  • Communication failure
  • Motivation problems -> low quality
44
Q

What are external economies of scale?

A

As an industry increases output, average cost for firms decrease

45
Q

What are examples of external economies of scale?

A
  • Access to skilled labour
  • More infrastructure in an area
  • Increased growth of suppliers
46
Q

What are external diseconomies of scale?

A

As an industry increases output, average cost for firms increase

47
Q

What are examples of external diseconomies of scale?

A
  • Price inflation for FOP e.g. wages
  • Congestion of infrastructure e.g. roads
48
Q

What is the Minimum Efficient Scale (MES)?

A

The minimum long run output level at which average cost is minimised for a firm
Applies to natural monopolies e.g. utilities

49
Q

What is revenue?

A

The income for a business (typically from sales)

50
Q

How is revenue calculated?

A

Revenue = price x quantity
R = P x Q

51
Q

How is average revenue calculated?

A

Total revenue / Quantity
TR/Q

52
Q

What is marginal revenue?

A

The addition to total revenue from selling one more unit

53
Q

When MR > 0, what is TR doing?

A

TR is rising

54
Q

When MR < 0, what is TR doing?

A

TR is falling

55
Q

When is TR at its maximum?

A

When MR = 0

56
Q

What are features of perfect competition?

A
  • Many buyers and sellers
  • Firms are price takers
  • Products are homogenous (similar/interchangeable)
  • Low/no barriers for entry/exit
  • Perfect information
57
Q

What is an example of a market with perfect competition?

A

A fruit/veg market

58
Q

What are features of a monopoly (imperfect competition)?

A
  • One firm in the industry - price makers
  • Unique product - no substitutes
  • High barriers to enter/exit
  • Potentially imperfect/asymmetrical information
59
Q

What is profit and how is it calculated?

A

Profit is the difference between total revenue and total costs
Profit = TR-TC

60
Q

What are the roles of profit in a market economy?

A
  • To fund investment, to have organic growth
  • To reward enterprise
  • To reward business risk
  • Profit motive decides resource allocation in free market
61
Q

What is normal profit?

A

Profit that is just enough to keep the entrepreneur in business (covering all costs)

62
Q

What is abnormal/supernormal profit?

A

Profit that is more than enough to keep the entrepreneur in the industry (typically gained in imperfect competition (monopoly) in the long run)

63
Q

At what quantity of output is profit always maximised?

A

At Q MR = MC

64
Q

What is the difference between invention and innovation?

A

Invention - creating new ideas
Innovation - application of new ideas to improve business opportunities

65
Q

What is the supply-side effect of technological change?

A

New technology can improve efficiency/production, decreasing production costs and therefore AC decreases

66
Q

What is the demand-side effect of technological change?

A

New products and new markets are generated

67
Q

What is the benefit of technology change?

A

It can be sustaining - eg internet improves communication, lowering average costs

68
Q

What is the negative of technology change?

A

It can be disruptive - eg Amazon replacing high street, Uber replacing taxis, Apple Pay replacing cash/cheques, Air BnB replacing hotels

Economics (10 decks)

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