4.0 Production, Costs and Revenue (All in 1)

What is production in economics?

Production is the process of converting inputs, such as labour and capital, into goods and services 

What is productivity?

Productivity measures the efficiency of production, typically as output per unit of input

What is Labour Productivity

Labour productivity refers to the output produced per worker

Factors that affect Productivity

Technology

Job training

Work environment

Motivation

Why does specialisation necessitate an efficient means of exchanging goods and services?

Specialisation means individuals produce only part of what they consume, necessitating trade. Money serves as a medium of exchange, facilitating transaction and overcoming the limitations of barter systems

What are the benefits of specialisation and division of labour?

They lead to increased efficiency, higher productivity, and lower average costs. Workers become more skilled at specific tasks, reducing production time and improving quality 

What is division of labour

When production is broken down into many separate tasks

What is specialisation?

When workers are assigned specific tasks within a production process 

What are total returns?

The overall output produced by all inputs

What are returns to scale, and how do they differ?

Returns to scale describe how output changes when all inputs are increased proportionally. Increasing returns to scale occurs when output increases more than inputs. Constant returns to scale occurs when output increases at the same rate as inputs, Decreasing returns to scale occur when inputs are increasing at a higher rate than outputs

What is the difference between the short run and long run in production?

In the short run, at least one factor of production is fixed, limiting the firm's ability to change its output level. In the long run, all factors are variable, allowing firms to adjust the input to change output

What are marginal returns?

The additional output from one more unit of input

What are average returns?

Average returns are the output per unit of input

What is the law of diminishing returns?

In the short run, when variable factors of production are added to a stock of fixed factors of production, total/marginal returns will initially rise and then fall

What are variable costs? 

Variable costs change with the levels of output (e.g. wages)

Average costs

Total costs divided by the output

What are fixed costs

Fixed costs remain constant regardless of output (e.g. salaries)

Marginal Costs

Additional cost of producing one more unit

The difference between short-run and long-run costs?

In the short-run, some inputs are fixed, leading to both fixed and variable costs

In the long-run, all inputs are variable, and firms can adjust all factors of production 

What are Total costs

The sum of all production costs

Marketing economies of scale

Firms can spread advertising and branding costs over a larger output, reducing the cost per unit

Managerial Economies of Scale

As firms grow, they can hire specialised managers to oversee different areas, improving efficiency and productivity 

What is the difference between internal and external economies of scale

Internal economies of scale occur within a firm as it grows, leading to lower average costs 

External economies of scale occur outside a firm, benefiting all firms in a market due to factors like improved infrastructure 

Financial Economies of Scale

Bigger firms usually have better access to credit and can borrow lower interest rates due to their size and reputation

Technical Economies of Scale

Larger firms can invest in more efficient and high capacity capital, lowering average production costs

Purchasing economies of scale

Large firms can buy raw materials in bulk and negotiate lower prices from suppliers

What is the minimum efficient scale (MES)

The lowest level of output at which a firm can produce such that is long-run average costs are minimized. At this point, the firm had fully exploited all available economies of scale, and producing beyond this output does not lead to further reduction in average costs

Risk-Bearing 

Economies of Scale - Large firms can diversify their product lines and markets, reducing the impact of failure

What are the reasons for diseconomies of scale

Diseconomies of Scale arise when a firm's growth leads to inefficiencies, 

• Control

• Communication

• Coordination

• Motivation

When is total revenue maximised

When marginal revenue = 0

Why is the average revenue curve the firm's demand curve

The average revenue curve represents the price at which each unit is sold

Marginal Revenue

The additional revenue gained from selling one more unit of a product

Relationship between average and marginal revenue 

In perfect competition, average revenue equals marginal revenue 

In imperfect competition, marginal revenue is less than average revenue due to the downward sloping demand curve

Total Revenue

Total income a firm receive from selling its goods or services

Average Revenue

Revenue per unit sold 

What is profit

Profit is the financial gain an firm makes

How is profit calculated

Total revenue - Total Costs (TR-TC)

What is the role of profit in a market economy?

Profit serves as an incentive for innovation and efficiency, signals where resources should be allocated, and rewards risks

What is the difference between normal and abnormal (SNP) profit

Normal profit is the minimum profit necessary for a firm to remain in business TR=TC

Supernormal profit is profit exceeding normal profit TR>TC

How does technological change create new markets

New technologies can create entirely new industries or sectors- such as mobile apps

How can technological change destroy existing markets?

It can make old products or services outdated - streaming platforms have replaced DVD market (creative destruction)

How can technological change lead to the development of new products?

Innovation enables firms to design and produce entirely new goods or improve existing ones

What is the difference between invention and innovation?

Invention is the creation of a product

Innivation is taking inventions and improving or applying them in new ways

What is Creative Destruction

Refers to the process where new innovations replace outdated technologies or products, leading to the transformation of industries and markets