Production, Costs and Revenue Flashcards
(53 cards)
1
Q
Production
A
The conversion of inputs into a final output, satisfying consumer needs and wants
2
Q
Productivity
A
Output per unit of input per period of time
3
Q
Labour Productivity
A
Output per worker per hour
4
Q
Increased Productivity
A
The same input will produce more output in the same period of time
5
Q
Specialisation
A
When each worker completes a specific task in a production process. The division of labour allows for increased worker productivity
6
Q
Advantages of specialisation
A
- Higher output as production is focused on what people/firms are best at
- More opportunities for economies of scale
7
Q
Disadvantages of specialisation
A
- Work becomes repetitive, lower worker motivation and therefore productivity
- Increase structural unemployment as skills may not be transferrable
- Variety of goods/services for consumers may decrease
8
Q
Short run
A
At least one of the factors of production is fixed
9
Q
Long run
A
All factors of production are variable
10
Q
Marginal product of a factor
A
The extra output derived per unit of the factor employed
11
Q
Average return of a factor
A
The output per unit of input
12
Q
Total return of a factor
A
The total output produced by a number of units of a factor over a period of time
13
Q
Law of diminishing returns
A
- As more units of a variable factor of production are added to a fixed factor, the marginal product of the variable factor will eventually decline
- This occurs in the short run
14
Q
Returns to scale
A
- The change in the output of a firm after an increase in factor inputs
- This occurs in the long run
15
Q
Increasing returns to scale
A
The percentage increase to the output is greater than the percentage increase to the inputs
16
Q
Decreasing returns to scale
A
The percentage increase to the output is smaller than the percentage increase to the inputs
17
Q
Constant returns to scale
A
Inputs and output increase by the same percentage
18
Q
Fixed costs
A
- Indirect costs that do not vary with output
- e.g rent, advertising, capital goods
19
Q
Variable costs
A
- Direct costs that change with output
- e.g cost of raw materials
20
Q
Total costs
A
- The cost to produce at a given level of output
- Total costs = total variable costs + total fixed costs
21
Q
Average costs
A
- The cost per unit
- Average costs = total costs / quantity produced
22
Q
Marginal cost of production
A
The cost of producing one extra unit of output
23
Q
Short run average total cost curve
A
- It is U-shaped due to diminishing marginal returns as at least 1 factor of production is fixed (usually capital/land)
- Costs decrease initially as hiring more workers allows for productivity increase due to specialization and better use of fixed resources
- Costs increase at higher levels of output as the fixed factor becomes a constraint
24
Q
Long run average cost curve
A
- Average costs initially fall as firms can take advantage of economies of scale and falling average costs
- After the optimum level of output average costs begin to rise due to diseconomies of scale
25
Internal economies of scale
- They occur when a firm becomes larger
- Average costs of production fall as output increases
- Risk-bearing, Financial, Managerial, Technological, Marketing, Purchasing
26
Risk-bearing economies of scale
When a firm becomes larger they can expand their production range, spreading the cost of uncertainty. If one part is unsuccessful they have the rest of the firm to fall back to
27
Financial economies of scale
Banks are willing to lend larger loans, and at lower rates, as large firms as deemed less risky
28
Managerial economies of scale
Larger firms can specialise and divide their labour, hiring specialist managers to boost output
29
Technological economies of scale
Larger firms can invest more into advanced machinery and capital, lowering average costs
30
Marketing economies of scale
Larger firms can divide their advertising budget across larger outputs, lowering the cost of advertisement per unit
31
Purchasing economies of scale
Larger firms can bulk buy, reducing unit costs as they have greater buying power
32
External economies of scale
- Lower average costs when the industry as a whole grows
- e.g infrastructure improvements, skilled labour pooling, support industries
33
Diseconomies of scale
- When output exceeds the optimum level and average costs start to increase per extra unit of output produced
- Control, Coordination, Communication
34
Control diseconomies of scale
It is harder to monitor workforce productivity as the firm expands
35
Coordination diseconomies of scale
It is harder to coordinate workers so that they are all working efficiently as the firm expands
36
Communication diseconomies of scale
Workers may feel alienated as the firm grows, leading to falls in productivity as motivation decreases
37
Minimum efficient scale
The lowest point on the LRAC curve (the optimum level of output)
38
L-shaped LRAC curve
The L-shaped LRAC curve suggests that average costs will not rise due to disconomies of scale - they will fall as economies of scale are utilised before becoming constant
- This is due to modern firms utilising better technology and outsourcing
39
Total revenue
- The revenue received from the sale of a given level of output
- Total revenue = quantity sold * price
40
Average revenue
- The price each unit is sold for
- Average revenue = total revenue / quantity sold
41
Marginal revenue
The extra revenue earned from the sale of one extra unit
42
Average revenue and demand curve
43
AR curve
- The AR curve is the same of the firms demand curve because it is the price of the good
- The AR curve is perfectly horizontal when firms are price takers, showing the perfectly elastic demand
44
Profit
The difference between total revenue and total costs
45
Normal profit
- The minimum reward required to keep entrepreneurs supplying their enterprise
- It must cover the opportunity cost of investing funds into the firm and not elsewhere
46
Supernormal profit
Any profit above the level of normal profit
47
Role of profit
- In a free market economy profit is the reward that entrepreneurs yield when they take risks and make investments
- Entrepreneurs want to maximise their profit so they are incentivised to innovate, reducing costs and improving quality
- Profit can be retained to act as a cheap source of finance
- Profit acts as a signal to firms, causing new firms to enter markets where firms are making supernormal profits
48
Innovation
The act of improving or contributing to existing products
48
Invention
The process of creating a new product (or new process to make an existing product)
49
Impact of technological change
- Improvements in efficiency and productivity, lowering costs of production for firms
- Affects market structures as it removes barriers to entry but may allow for greater monopoly power
- Generally creates higher skilled jobs but reduces demand for low-skilled workers
49
Creative destruction
The process by which new innovations replace outdated industries as new technologies emerge and allow for more efficient firms
50
Technological change in monopolies
Monopolies have no incentive to innovate due to a lack of competition
51
Technological change in oligopolies
Oligopolies have an incentive to innovate in order to get ahead of their competitors
