4. Production Costs and Revenue

Productivity

the output per unit of input employed. A measure of efficienct

A fall in labour productivity leads…

a rise in firms’ cost of production

labour productivity

the output per worker or output per hour worked

Consumer durables

provide a steady flow of utility over their working life

Specialisation

When a product or task is concentrated on

Division of labour

when production is broken down into many separate tasks

Specialisation/division of labour advantages (4)

1. higher labour productivity and business profits
2. creates surplus output that can then be traded internationally
3. lower prices, higher real incomes and GDP growth

Specialisation/division of labour disadvantages (4)

1. unrewarding and repetitive work → lower productivity
2. may create structural unemployment due to little training
3. mass-produced goods lack variety for customers
4. countries can become less self-sufficient

Marginal Returns

the extra output derived per extra unit of labour employed

Average Returns

the output per unit of input

Total Returns

the total output produced by all the factors of production

The law of diminishing marginal returns

if one variable factor of production is increased while other factors stay fixed, eventually, marginal returns from the variable factor will begin to decrease, as well as then average returns

Draw the total, margin and average return curves

Returns to scale

the change in output of a firm after an increase in factor inputs

Fixed costs, example

Costs which do not vary with output, salaries

Marginal cost. What is it affected by?

the cost of producing one extra unity of output
Only affected by variable costs

Average Costs

The cost per unit produced

Total Costs

all costs involved to produce a given level of output

Draw the Average Fixed Cost Curve + why is it like that

because the total fixed costs is spread across a greater output

Draw the Average Variable Cost Curve + why is it like that

Due to the law of diminishing marginal returns

Draw the Marginal Cost and Average Cost Curve

When MC is low than AC, AC…. This is because…

will be falling. each extra unit produced will decrease the average cost

Productive Efficiency

When Average cost is at its lowest, MC=AV

Draw TFC,TC,TVC

Economies of scale
draw this on a diagram

A reduction in LRAC as output increases

Internal Economies of Scale Anagram

Really Fun Mums Try Making Pies

External Economies of Scale 3 reasons>

Draw this on a diagram

1. better transport infrastructure

2. Component suppliers move closer

3. research and development firms move

Reasons for Diseconomies of Scale Anagram

CCCM

Draw the Long Run Average Cost Curve

The minimum efficient scale

the lowest level of output required to exploit full economies of scale

Total Revenue

The total income generated from selling

Average Revenue

The revenue per unit sold

Marginal Revenue

the change in total revenue for every additional unit of output

Draw the AR,MR,TR curves for an imperfect market

Draw the AR,MR,TR curves with elasticities and explain

1. When TR is at its maximum ( and MR is 0), demand is unit elastic
2. To the left PED is elastic as decreasing the price will cause a more than proportionate increase in sales and TR will increase
3. To the right, PED is elastic as decrease the price will cause a less than proportionate increase in sales and TR will decrease

normal profit

The minimum level of profit required to keep the factors of production in their current use AR=AC

Supernormal Profit

Any profit made above normal profit AR>AC

Draw Max Revenue, Max Profit, Max Sales, Allocative efficiency, with profits

Where is max profit and why

MC=MR, The cost of producing an extra unit is covered by the marginal revenue

Where is maximum sales

AR=AC

Where is allocative efficiency and why

MC=P, the price that consumers are willing and able to pay

Innovation

transforming an invention into commercial reality

What is an economic good?

a good or service that has utility which has an opportunity cost

What is a capital good

one that is used to make consumer goods and services

Draw the long run average cost curve for a natural monopoly and explain it

→ a natural monopoly has very high fixed costs

→ it would take a huge level of output to minimise its average cost

→ therefore, the curve is constantly downwards sloping

→ potential for economies to scale is very big

Draw economies of scale on a cost, revenue, production diagram (monopoly/monopolistic competition)

• higher output

• lower maximising price

• higher profit

• higher producer surplus

• higher consumer surplus

Draw and explain why natural monopolies may not want to be allocatively efficient

If a natural monopoly were operating at allocative efficiency MC=P, they would be making a loss (abnormal profit) A fair price would be AC=AR, they would breakeven and make normal profit.

firms are more likely to maximise their profits (highlighted) , as to charge a fair price, they have to sell a very large quantity

Draw x inefficiency on an LRAS diagram for a monopoly and explain the consequences of it

→ X inefficiency means that LRAS may increase and the firms may experience external diseconomies of scale. They may not have control over them:

• lack of funding

• suppliers moving further away

• lack of infrastructure

• R&D

• education and training

Draw revenue curves for a perfect competition markets. What type of elasticity is the D curve

→ a perfectly elastic demand curve

What is creative destruction

Innovation can lead to creative destruction and destroy whole markets e.g. the development of cars has destroyed public transport markets in some areas

• Music and book retailing (Amazon)

• Music and Streaming (Spotify)

• Media and Entertainment (Netflix, Youtube)