Production, Costs and Revenue

Full set of Flashcards on Production, Costs and Revenue section of AQA A-Level Economics

Production is

The conversion of factor input

Forms of production

• Land productivity is the output of worker per time period

• Capital productivity is the output per unit of capital

• Factor productivity is the average output of all factors of production

Economies of scale occur

As long run average costs fall as the scale of production increases

Productive efficiency is created when

• Purchasing economies of scale lead to a reduction in costs

• Specialisation can lead to a more efficient use of inputs

• Better Management can lead to increased output with same factor inputs

Diseconomies of scale occur

As long run average costs rise as the scale of production increases

Productive inefficiency occurs due to

• Lack of communication between employees

  • Larger firms find it more difficult to communicate efficiently

  • Increased cost for communication methods

  • Managers of small firms can communicate instantly

• Lack of coordination by management

  • Larger firms find it difficult to manage increased personnel and customer numbers

  • Difficult to delegate to and motivate workers

• Bureaucracy - large organisations

Specialisation increases output as

• Each economic unit can specialise in what they are best at

• Efficient use of time as there is no switching between tasks

• Technical economies of scale as capital equipment is used to produce goods and services

Specialised use of workers is

Division of Labour

Money is more efficient than barter as it is

• A medium of exchange

  • An intermediary between two parties

• A store of value

  • It can be kept for future use

• A unit of account

  • It allows us to measure the value of goods and services in units (price)

• A standard deferred payment]

  • Pay now for later

Short run is

• Time period where at least one factor of production is fixed - normally capital

  • Firms will stay in production if variable cost is covered

Long Run is

• Time period where no factors of production are fixed - scale of output can be changed

  • Firms will leave the industry if total costs aren’t covered

Fixed Cost is

Costs that don’t change with output (rent)

Variable Cost is

Costs that vary with output, as output increases so does it (raw materials)

Total Cost is

Fixed + Variable

Average Cost is

The cost of producing one unit (Total Cost/ Units Sold)

Average Variable Cost is

Total Variable Cost/ Output

Marginal Cost is

The cost of producing one more unit

When MC<AC

AC isa falling

When MC>AC

AC is rising - Disecon of Scale

Short Run Costs occur

When at least some costs are fixed - time frame differs by firm

Long Run Costs occurs

When all costs are variable

Relevant Costs are

Those that are used to make decisions on an investment - includes opportunity cost

Sunk Costs should be

Ignored but as can be seen in behavioural economics this is not always the case

Internal Economies Of Scale

Occur due to an increase on the scale of production in the firm

Types of internal EOS

• Purchasing Economies

  • Bulk buying

• Technical Economies

  • Machines (specialised)

• Managerial Economies

  • Specialist labour (lawyer)

• Financial Economies

  • Better interest rates and higher credit scores on loans

External EOS occurs

Due to an increased scale of production within the industry the firm operates in

• A fall in ACT due to factors out side the control of firm

• Impact on firms within the same industry or geographical region

• Create positive externalities:

  • improved transport infrastructure

  • pool of skilled workers

Diseconomies of Scale

• Communication

  • Larger firms find it more difficult to communicate efficiently

  • Increased cost for communication methods

  • Managers of small firms find it easier to communicate effectively with their whole team

• Coordination

  • Larger firms find it more difficult to manage the increased number of personnel and customers

  • Increasingly difficult to delegate to and motivate workers

Total Revenue is

All the money received by the firm from the sale of its goods and services

= Price x Quantity

Average Revenue

= Total Revenue/ Units sold = Price

So the Average Revenue Curve = the Demand Curve

Normal profit is

The level of profit required for a firm to stay in the industry in the Long Run (includes the opportunity cost)

Supernormal Profit is

The level of profit over and above normal profit

• When AR>AC

• Supernormal profit occurs because a firm has some monopoly power

• Attracts new firms to the market

Profit Maximising Firms will

Aim to make supernormal profits in imperfectly competitive markets

Sales Maximising firms

Might make supernormal profit but not at the maximum level

Profit Satisfying Firms

Might make supernormal profit but not at the maximum level