Chapter 4 : Production, costs and revenue

Question 1

What is production?

Answer 1

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

Question 2

What is productivity?

Answer 2

Productivity measures the rate of production by one or more of the factors of production.

Question 3

What is labour productivity?

Answer 3

The output per worker.

Question 4

What is the formula for productivity?

Answer 4

productivity = total output per period of time / number of units of factors of production

Question 5

What is the formula for labour productivity?

Answer 5

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

Question 6

What is the productivity gap?

Answer 6

The difference between labour productivity in e.g. the UK and other developed economies.

Question 7

What is specialisation?

Answer 7

When an individual, firm, region or country produces a limited range of goods and services.

Question 8

What is an example of specialisation?

Answer 8

A firm specialising in accountancy.

Question 9

What is division of labour?

Answer 9

Specialisation at the level of the individual worker.

Question 10

What is an example of division of labour?

Answer 10

One worker making pins from start to finish might make 20 pins in a day whereas ten workers doing individual tasks to make the pin might make 48000 pins in a day.

Question 11

What is exchange?

Answer 11

When one thing is traded for another.

Question 12

What is an example of exchange?

Answer 12

An hour of work is exchanged for a wage.

Question 13

What is bartering?

Answer 13

The exchange of goods and services for other goods and services.

Question 14

What are the benefits of specialisation and the division of labour?
Explain them.

Answer 14

• Increase in skill
• Increase in productivity
• Ability to use specialist machinery
• Workers are able to work to their strengths

Question 15

What is the short run?

Answer 15

In the short run the availability of at least one of the factors of production are fixed in terms of how much a firm can use.

Question 16

What is the long run?

Answer 16

In the long run all factors of production a firm uses can be varied they are variable.

Question 17

What are fixed costs? Give an example.

Answer 17

Fixed costs are costs that do not vary directly with the level of output. An example is energy bills.

Question 18

What are variable costs? Give an example.

Answer 18

Variable costs are costs that vary directly with the level of output. An example is casual wages.

Question 19

What are variable costs? Give an example.

Answer 19

Variable costs are costs that vary directly with the level of output. An example is casual wages.

Question 20

What are average fixed costs?

Answer 20

Costs that fall as output increases because firms are able to spread out the costs over an increasing volume of output.

Question 21

What is the formula for average fixed costs?

Answer 21

AFC = total fixed costs / output

Question 22

What are average variable costs?

Answer 22

Costs that initially fall in the short run but increase as there is more output and more factors of production that begin to overcrowd the fixed factors of production.

Question 23

What is the formula for average variable costs?

Answer 23

AVC = total variable costs / output

Question 24

What are total costs?

Answer 24

Costs that are made up of fixed and variable costs.

Question 25

How do you calculate total costs?

Answer 25

Total fixed costs + Total variable costs

Question 26

What is marginal cost?

Answer 26

The additional cost to a firms total costs after producing an additional unit of output.

Question 27

What is the law of diminishing returns?

Answer 27

When an additional unit of the variable factors of production are added to a fixed factor, marginal product will decrease eventually.

Question 28

Give an example of the law of diminishing returns.

Answer 28

- A busy kitchen restaurant - More workers are hired - Increase in productivity and returns - Increase in specialisation and division of labour - Very busy in the kitchen now - Reduction in productivity because too many employees getting in each others way

Question 29

What is returns to scale?

Answer 29

Shows the relationship between an increase in the quantity of firms inputs and the proportional change in output.

Question 30

What is increasing returns to scale?

Answer 30

When an increase in the quantity of a firms inputs leads to a greater level of output.

Question 31

What is decreasing returns to scale?

Answer 31

When an increase in the quantity of a firms inputs leads to a lower level of output.

Question 32

What is constant returns to scale?

Answer 32

When an increase in the quantity of a firms inputs leads to an identical level of output.

Question 33

What is economies of scale?

Answer 33

The reduction in average total costs due to firms increasing their output in the long run. Basically output increases then ATC decreases.

Question 34

What is an example of economies of scale?

Answer 34

Laptop prices have fallen over time because big companies like Apple produce in a large scale. This allows them to lower their average costs and they pass on these savings to consumers by charging lower prices.

Question 35

What is internal economies of scale?

Answer 35

When a reduction in long run average total costs results from the growth of the firm.

Question 36

What are the types of internal economies of scale?

Answer 36

Financial economies of scale, technical economies of scale, managerial economies of scale, marketing economies of scale.

Question 37

What is financial economies of scale?

Answer 37

That the larger and more reputable a firm is the more likely banks will see them as credit worthy and loan them money as they are seen as less risky recipients of loan funds.

Question 38

What is an example of financial economies of scale?

Answer 38

Firms will begin to bulk buy their products due to bulk buying discounts.

Question 39

What is technical economies of scale?

Answer 39

That larger firms are able to afford specialist capitalist machinery which can lead to an increase in productivity and output.

Question 40

What is an example of technical economies of scale?

Answer 40

Car manufacturing firms like Toyota and Volkswagen are able to afford assembly lines which can increase production and decrease average cost of production.

Question 41

What is marketing economies of scale?

Answer 41

That larger firms tend to have huger advertising budgets.

Question 42

What is an example of marketing economies of scale?

Answer 42

Marks and Spencer are able to advertise on TV during Christmas because they make more sales they can spread this budget over a larger output than a smaller retail.