1.3- production costs and revenue

what is production

production converts inputs such as services into a final output that will satisfy consumer needs and wants

productivity calculation

output per worker per period of time

what does being productive mean in terms of input and time

the same input over the same period of time

how does beig less productive affect production

a larger input is required to produce the same quantity of output

how can productivity be increased

by training workers or using more adavanced capital machinery

how does productivity affect costs

being more productive lowers the average costs per unit

what is specialisation

occurs when each worker completes a specific task in a production process

who created the concept of specialisation

Adam Smith- through division of labour, worker productivity can increase. Firms can then take advantage of increased efficiency and lower average costs of production

advantages of specialisation

• Higher output and potentially higher quality

• There could be a greater variety of goods and services produced.

• more opportunities for economies of scale, so the size of the market increases

• more competition and this gives an incentive for firms to lower their costs, which helps to keep prices down

disadvantages of specialisation

• repetitiveness could lower the motivation of workers, potentially affecting quality and productivity. Workers could become dissatisfied

• more structural unemployment, less transferable skills, especially because workers have focussed on one task for so long

• by producing a lot of one type of good through specialisation, variety could decrease for consumers.

• higher worker turnover for firms, which means employees become dissatisfied with their jobs and leave regularly

how does specialisation affect trade

• countries can exploit their comparative advantage in a good, which means they can produce a good at a lower opportunity cost to another

what is absolute advantage

occurs when a country can produce more of. agood with the same factor inputs

advantages of specialisation in production to trade

• Greater world output, so there is a gain in economic welfare.

• Lower average costs, since the market becomes more competitive.

• There is an increased supply of goods to choose from.

• There is an outward shift in the PPF curve

disadvantages of specialisation in production to trade

• Less developed countries might use up their non-renewable resources too quickly, so they might run out.

• Countries could become over-dependent on the export of one commodity, such as wheat

what are the functions of money

a medium of exchange, a measure of value, a store of value, a method of deferred payment

what does a measure of value mean

Money provides a means to measure the relative values of different goods and services

what does a store of value mean

• Money has to hold its value to be used for payment. It can be kept for a long time without expiring

• the quantity of goods and services that can be bought with money fluctuates slightly with the forces of supply and demand.

what does a method of deferred payment mean

Money can allow for debts to be created. People can therefore pay for things without having money in the present, and can pay for it later. This relies on money storing its value.

what is a characteristic in the short run

at least one factor of production cannot change, there are some fixed costs

what is a characteristic in the long run

all factor inputs can change, all costs are variable

what is a fixed cost

costs which do not vary with output and are indirect e.g. rents, advertising and capital goods

what is a variable cost

costs that change with output and are direct costs e.g. the cost of raw materials increases as output increases

how to calculate total cost

total costs = total variable costs + total fixed costs

how to calculate average costs

average costs = total costs / quantity produced

why is sr average cost curve u shaped

• due to diminishing returns

• the factors of production are fixed. At one point, employing more resources will be less productive which means the marginal output decreases per extra factor of production.

• Marginal costs start to increase

long run average cost curve analysis

• initially avergae costs fall, since firms can take advantage of economies of scale. This means average costs are falling as output increases

• After optimum level of output, where avergae costs are lowest, average costs rise due to diseconomies of scale

when are there internal economies of scale

when a firm become larger. average costs of production fall as ouput increases

examples of internal economies of scale

risk-bearing, financial, managerial, technological, marketing, purchasing

what does risk-bearing mean

• as a firm becomes larger they can expand their product range

• therefore they can spread the cost of uncertainty

• if one part is not successful, there are other parts to fall back on

who are banks more likely to give loans and why

• more willing to lend loans cheaply to firms are they are deemed less risky

• larger firms can take advantage of cheaper credit

what does managerial mean

larger firms are able to specialise and divide their labour

what are network economies of scale

gained from expansion of e-commerce e.g. ebay

what are external economies of scale

these occur within the industry e.g a local road might be improved so transport costs for local industries will fall

when does diseconomies of scale take place

occur when output passes a certain point and average costs start to increase per extra unit of output produced

examples of diseconomies of scale

control, co-ordination, communicate

how is control a diseconomy of scale

becomes harder to monitor how productive the workforce is, as the firm becomes larger

how is coordination a diseconomy of scale

 harder and complicated to coordination every worker, when there are thousands of employees

how is communication a diseconomy of scale

Workers may start to feel alienated and excluded as the firm grows. This could lead to falls in productivity and increases in average costs, as they lose their motivation.

explain long run average cost curve diagram

• intitally average costs fall, since firms can take advantage of economies of scale

• this means average costs are falling as output increases

• after optimum level of output, average costs rise due to diseconomies of scale

total revenue calculation

price x quantity sold

average revenue calculation

TR/ quantity sold

where is the average revenue curve seen

the firm’s demand curve and it is horizontal

what is profit

the difference between TR and total costs. It is the reward entrepreneurs receive from taking risks