Chapter 4

Question 1

Production

Answer 1

The total output of goods and services produced by an individual, firm or country

Question 2

Productivity

Answer 2

Measurement of the rate of production by one or more factors of production

Question 3

Labour productivity

Answer 3

Output per worker per unit of time

Question 4

Specialisation

Answer 4

Where an individual worker, firm, region or country concentrates on producing a limited range of goods and services in which they are most efficient

Question 5

Division of labour

Answer 5

Specialisation at the level of an individual worker
(Each worker has a specific role to be more efficient in production)

Question 6

Exchange

Answer 6

When one thing is traded for something else
(Hours work then set rate of pay)

Question 7

The benefits of specialisation and division of labour

Answer 7

• increase skill leading to worker becoming an expert (surgeons)

• reduced time spent moving between different tasks or workstations meaning increase productivity

• efficient to use specialist machinery

• Allows people to work their natural strengths (physical/technical skill/communicating)

Question 8

Short run

Answer 8

Period of time in which availability of Atleast one factor of production is fixed

Question 9

Long run

Answer 9

A period of time over which all factors of production can be varied

Question 10

Fixed costs

Answer 10

Costs of production that don’t vary with level of output in the short run (rents on business premises, buildings insurance, salaries of senior staff)

Question 11

Variable cost

Answer 11

Cost of production that vary with level of output (raw materials, packaging, wages of casual staff)

Question 12

Total cost

Answer 12

Fixed cost + variable cost

Question 13

Average total cost

Answer 13

Total cost divided by number of units of output

Question 14

Marginal cost

Answer 14

Addition to a firms total cost from making an additional unit of output

Question 15

Law of diminishing returns

Answer 15

When additional units of variable factors of production are added to a fixed factor, marginal output or product will eventually decrease

Question 16

Returns to scale

Answer 16

Relationship between increases in the quantity of a firm’s inputs and the proportional change in output

Question 17

Increasing returns to scale

Answer 17

When an increase in the quantity of a firm’s inputs leads to a proportionally greater change in output

Question 18

Constant returns to scale

Answer 18

Where an increase in the quantity of a firm’s inputs leads to a proportionally identical change in output

Question 19

Decreasing returns to scale

Answer 19

When an increase in the quantity of a firm’s inputs leads to a proportionally lower change in output

Question 20

Economies of scale

Answer 20

Average total costs decrease as output increases in the long run

(Large firms/expanding firms)

Question 21

Internal economies of scale

Answer 21

As a firms growth increases, long run average total costs decrease

Question 22

Internal economies of scale include:

Answer 22

Financial

Technical

Marketing

Managerial

Purchasing

Question 23

Financial economies of scale

Answer 23

Larger and more reputable a firm is, the more likely it’s that banks and other lenders will see it creditworthy and a less risky recipient of loan funds. Leads to cheaper loans (lower interest rate) reducing costs.

Question 24

Purchasing economies of scale

Answer 24

Example of financial

Larger firms can take advantage of price discrimination (bulk buying discounts)

Question 25

Technical economies of scale

Answer 25

Larger firms can generally afford the latest, specialist capital equipment, which is often very expensive.

Question 26

Marketing economies of scale

Answer 26

Larger firms are likely to have huge advertising budgets (due to larger volume to sales)

Question 27

Managerial economies of scale

Answer 27

Larger firms can afford to recruit highest profile CEOs who attract high salaries but are most effective in increasing profits through increasing revenues and reduce costs

Question 28

External economies of scale

Answer 28

Reductions in long run average total costs arising from growth of the industry the firm operates in

Question 29

Diseconomies of scale

Answer 29

Increase in average total costs from increasing output

Question 30

Diseconomies of scale reasons:

Answer 30

• Co-ordination and control (as a firm gets larger, more difficult to monitor what all resources are doing and how they’re deployed, results in increase wastage and loss of quality) • Communication (as a firm grows, especially if it’s multinational and different time zones, it can be difficult to communicate effectively and result in ineffective decision making and delays in action, leading to lack of motivation and productivity)

Question 31

Minimum efficient scale (MES)

Answer 31

The lowest level of output at which average total costs are minimised

Question 32

Total revenue

Answer 32

The money a firm receives from selling its output Price x quantity sold

Question 33

Average revenue

Answer 33

Total revenue divided by units of output (AR = to price in a firm that sells one product at a fixed price, in perfect competition = D, what consumers are willing to pay)

Question 35

Marginal revenue

Answer 35

Addition to a firms total revenue from selling an additional unit of output

Question 36

Perfect competition characteristics

Answer 36

• Large number of buyers and sellers • Price taker • Perfect knowledge • No barriers to entry or exit • Each firm sells an identical product

Question 37

Monopoly

Answer 37

25% or more market share in the market

Question 38

Pure monopoly

Answer 38

Sole seller in the market

Question 39

Profit

Answer 39

Total revenue - total costs

Question 40

Normal profit

Answer 40

Minimum level of profit required to reward the entrepreneur for taking a risk and to stay in the business

Question 41

Supernormal profit

Answer 41

Profit over and above normal profit (Referred to as abnormal or excess profit)

Question 42

Technological change arises from:

Answer 42

Invention Innovation

Question 43

Invention

Answer 43

Creation of a product or process

Question 44

Innovation

Answer 44

New products and production processes that are developed into marketable goods or services

Question 45

What can technological change do

Answer 45

• development of new products and markets • destruction of existing markets • Reduce long-run average total costs (dynamic efficiency) • increase competition (internet) • decrease competition if it’s protected by a patent (which allows a legally backed monopoly for 20 years)

Question 46

Creative destruction

Answer 46

Where technological change leads to the development of new, ‘disruptive’ products that leads to existing products to become obselete