production costs and revenue Flashcards
(23 cards)
production
processes that convert inputs into outputs
specialisation
concentration of production on a narrow range of goods/services
advantages of specialisation
increase in output
wide range of goods and services such as dyson:vaccuums
an increase in allocative efficiency: resources allocated where they are best suited and used efficiently rather than being wasted producing goods services
imprvements in quality-performing same task numerous tiems become so good quality rises
disadvantages of specialisation
problem of fintite resoruces-this is because resources required in production may run out where firms and countries rely on specialisation woudl suffly greatly from lsot revenue
changes in fashion-this is because a firm that specialises in producing is reliant ona f ashionable demand thereby loss in revenue
decreasing returns to scale
when an increase in input in production leads to less than proportionally increase in output
if a car firm increases its variable inputs (capital, raw materials and labour) by 50%, but the output of cars, increases by only 35%, then we say there are decreasing returns to scale from increasing the quantity of input
happens in diseconomies of scale
increasing returns to scale
increasing returns to scale means when inputs double, output more than doubles.
constant returns to scale
: Output increases in proportion to input increases. For example, if a factory doubles its inputs (labour, capital, etc.), its output will also double.
external economies of scale
External economies of scale refer to the cost advantages that multiple firms in the same industry or region can collec-tively enjoy as the industry or region grows.
· These cost savings are typically a result of factors beyond the control of any single firm, such as the availability of a skilled labour force, specialized suppliers, infrastructure development, or a supportive business environment.
· External economies of scale benefit all firms in a particular industry or location, and individual firms do not have direct control over them
Internal:Financial economies of scale
large firms able to negotiate lower rates of interest on loans for investmetn projects.
this is because large firms ahv e atrack history of succcess and less risky to lend money
firms borrow a huge sum of money which does not increase marginal cost for bank thus keeping interest rates low
for example walmart Triple A credit rating
tesco A minus credit rating
Interal:Technical economies of scale
occurs as firms grow in a size and arble to purchase highly specialist amchinery to enhance their proudction
as aconsequnce the productivity of capital increase where output rises faster than total costs reducing average costs and unit of production
internal: managerial economies
large firm is able to employ specialist managers to imrpove the productivity of workers in a business. this improvement in productiivity will increase output more than total costs reducing unti costs.
examples: mchire wanting mcdonalds accountants
Internal: purchasing economies
occurs when a firm is able to purchase raw materials and component parts in buk and thus negotiate a large discount per unit
external: improvements in transport infrastructure
as a business become larger transport infrastructure may improve in locality of a business reducing cop
external:material suppliers move closer to where a business is located
as a business grows in size there is greater change of material suppliers moving clsoer to location of business which recues the cost of accessing raw materials reducing total costs and unit cost of production
external: research and development firms move close to where business are located
as a business grows in size greater chance of r and hubs developing clsoe by with businesses benefitting from innovation
diseconomies of scale:comunication
communication:when abusiness comes large managers find it hard to communicate with staff
with managers having more staff harder to monitor workers will realise the difficulty and shirk more at work reducing productivity
diseconomies of scale:motivation
larger a business becomes
the more workers feel alienated aand a less signifcant part of workforce
demotivates them
impacts morale rreducing productivity
increasing average costs
barriers to entry
any obstacle that prevents new firm entering a market
examples of barriers to entry
economies of scale(easily priced out if large)
high start up costs
high sunk costs-costs not recoverable when firm leaves market)
legal barriers(opatnetns,environmental regulation)
brand loyalty
Functions of Profit
-provides an incentive to invest and means for investment
-reward to risk taking entrepreneurial behaviour and shareholders(incentive to take risk with use of fop creating brand new products developing new tech to improve production processes)
benefit consumer by minimising costs(implying no waste in production, ensuring the needs and wants of consumers is met, exploiting all eos and ensuring regular investment to stay ahead of rival firms
allow price mechanism to work as an effective and efficient way of allocating resources(incentive function of price means shortsges and surpluses in a fm will not last giben greater profit potential for producers)
barriers to exit
obstacles that prevents a firm exiting a market
examples of barriers to exit
sunk costs-upon leaving an industry if a firm has to contractually pay large redudnancy package for its workers it may prevent a firm leaving an industry minimisng costs by continuing in production instead.
contractural agreements-if a firm has a contractural agreement for gas electricity , water may be a large cancellation fee applied with early contract ermination
sale of assets
