Costs, Revenue and Profits Flashcards
What is production?
the act of using factors of production to make a good or service. In an economy, the households provide the factors of production and in return, they receive factor returns that they will use to spend on the output of goods and services from firms.
What is productivity?
the amount of output produced per unit of input in a certain time.
For example, how many units a worker or machine produces in an hour. If a firm is being as productive as possible, i.e. it is getting maximum output for minimum cost, then it will maximise profit. The more productive an economy is, the more likely it is to have economic growth.
What are the advantages of specialisation?
-The firm becomes faster at producing a product.
-Consumers will have a greater variety of higher quality and cheaper goods because firms have become very good at producing goods more efficiently so this lowers price and increases quality.
What does specialisation increase?
Productivity, firms will specialise in producing a certain product
What is the disadvantage of specialisation?
By only producing one product or type of product, changes in demand can cause the firm to lose profit or have to close down.
What is division of labour?
Splitting production of a good or service into different tasks and workers will specialise in different tasks on this production line.
What are the advantages of division of labour?
-Workers become more productive as they become experts in their particular job.
-Less time is wasted moving between processes
-Easier to mechanise so the firm can use machines instead
-Less training time required because the firm only has to train a worker on one task.
What are the disadvantages of division of labour?
-The worker could become bored repeating the same task.
-Loss of craftsmanship because workers only focus on one small task.
-Increased stress because any hold up by one worker causes the whole production process to slow.
-Greater risk of unemployment because the worker is only skilled in one task so if there is no demand for this task he/she faces unemployment.
As a result of specialisation, what do firms find it easier to do?
firms now find it easier to substitute labour for capital. In other words, they replace workers with machines.
Firms now find it easier to substitute labour for capital, what does this lead to?
This can lead to improvements in productivity. The firm can produce more so it can earn more profit. This could mean that workers might get better pay. However, the introduction of machines can lead to large cuts in labour.
(it is not always possible to substitute labour for capital. For example, a machine cannot cut hair to the required standard or teach in the same way a human can.)
What is the short-run in economics?
at least one of your factors of production is fixed and cannot be expanded.
Example: A factory has one machine in the short-run the factory cannot purchase another machine so we can employ more labour during this time but no more machines.
What is the long-run in economics?
all the factors of production can be varied.
Example: In the long-run, we can vary all our factors of production – buy more machines, move to bigger premises.
What is a variable cost?
A variable cost is a cost which varies with output e.g. labour, raw materials, transport.
Costs which are directly involved in making a product, for example the raw materials you use or the labour actually working on the production line. This means that the more you produce the more the total variable cost will be.
What is a fixed cost?
Fixed costs are costs which do not vary with output e.g. rent, advertising, insurance.
There will be another group of costs which you will have to pay which stays the same no matter how much you make.
What are some examples of variable costs?
Raw materials, Wages of production line workers, Heating and Lighting
