Production costs and revenue

Question 1

What is production

Answer 1

The process of converting inputs to outputs

Question 2

What is productivity

Answer 2

The number of units of output per units of input (raw materials/factors of production)
- Labour productivity = output/worker
- Capital productivity = output/unit of capital

Question 3

What is the importance of production and productivity

Answer 3

• Profit
• Lower unit costs
• Competitiveness
• Trade performance
• Economic growth

Question 4

What is specialistion

Answer 4

Where workers have expertise in one specific task eg. surgeons, anaesthesiologists, specialists, diagnosticians etc.

Question 5

Evaluate specialisation

Answer 5

Pros
- Efficiency
- Productivity
- Greater output
- Economies of scale
- Lower training costs

Cons
- Monotony
- Overdependence
- Less transferable skills

Question 6

What is division of labour

Answer 6

Jobs broken down into separate tasks eg. production chain making cars (wheels, radio, seats, car body, paint, etc.)

Question 7

Evaluate division of labour

Answer 7

Pros
- Quality
- Speed
- Innovation
- Choice

Cons
- Communication
- Less job security
- Automation risk lowers job security

Question 8

Explain exchange

Answer 8

• Trade = buying and selling of goods and services
• Exchange = giving something for others
• Barter = exchanging goods and services directly

Question 9

What are the functions of money

Answer 9

• Medium of exchange
• Unit of account
• Standard of deferred payment
• Store of value

Question 10

Explain the law of diminishing returns (SR)

Answer 10

• SR = fixed scale of production, increasing output means further utilising current assets and resources
• Law of diminishing returns = FF + VF cause AP/MP/TP to rise but then fall as resources are exhausted and become inefficient
• TP slows as MP starts to fall and falls as MP reaches 0

Question 11

Explain returns to scale (LR)

Answer 11

• LR = scale of production can change, increasing output means increasing factors of production
• Returns to scale = relationship between input and output
• CRS = output rises proportional to rising input
• IRS = output rises faster than rising inputs
• DRS = output rises slower than rising inputs
• MES = lowest point on LRAS curve to produce to minimise costs and maximise efficiency

Question 12

Explain how the MES can be achieved in an L shaped LRAS curve

Answer 12

Assumed avoidance of diseconomies of scale through efficient investment and organisational/ managerial techniques

Question 13

Explain the SR costs of production diagram

Answer 13

• SR = at least one factor of production is fixed
• Curve is U shaped due to law of diminishing returns
• Diagram includes = MC, ATC, AVC, AFC
• ATC/AVC fall when above MC but rise as intercepts it

Question 14

Explain the LR costs of production diagram

Answer 14

• LR = all factors of production are variable
• LRAC = envelope curve (show lowest cost per unit at each level of production)
• Economies of scale occur as LRAC falls, MES occurs at lowest point, diseconomies of scale occur as LRAC rises

Question 15

Explain economies of scale

Answer 15

Unit costs decrease as production increases
- Internal (really fun mums try making pies)
–> Risk bearing
–> Financial
–> Managerial
–> Technical
–> Marketing
–> Purchasing
- External
–> Suppliers moving closer
–> R&D
–> Technological developments
–> Innovation
–> Transport
–> InfrastructureE

Question 16

Explain diseconomies of scale

Answer 16

When the business grows too large and the unit costs begin to decrease
- Internal (3C’s + M)
–> Control
–> Coordination
–> Communication
–> Motivation
- External
–> Competition
–> Scarce resources
–> Congestion
–> Natural disasters
–> High employment

Question 17

Explain revenue in perfectly competitive markets and monopolies

Answer 17

• Perf comp = AR/MR remains constant and is intercepted by TR (rising)
• Monopolies = AR falls and MR falls twice as fast, TR rises and falls when MR reaches 0

Question 18

What is the role of profit

Answer 18

• Entrepreneurial incentive
• Performance indicator
• Reward of risk taking
• Source of finance
• Invest
• Attract firms to markets

Question 19

What are the consequences of profit objectives

Answer 19

• Environmental damages (cut corners)
• Inequality (poverty gap)
• Incentivises excessive risk taking (2008)
• May take focus from other important objectives (social, ethical, environmental)

Question 20

Explain the impact of tech changes

Answer 20

• Driven by innovation
• Improve productive capacity
• Decrease labour costs
• Improve productive and dynamic efficiency
• Promotes creative destruction

Question 21

Explain creative destruction

Answer 21

• Industrial mutation to revolutionise economic structure
• Close older industries to reallocate funding to newer ones (reduce fossil fuel refinery, increase investment in sustainable power sources)