Topic 4 - Production, costs and revenue

production

converts inputs or factor services into outputs of goods and services

productivity gap

the difference in labour productivity between, for example, the UK and other developed economies.

productivity

output per unit of input

labour productivity

output per worker

capital productivity

output per unit of capital

specialisation

• a worker only performing one task or a narrow range of tasks.

• different firms specialising in producing different goods or services.

division of labour

different workers performing different tasks in the course of producing a good or service

benefits of specialisation and division of labour

• A worker will not need to switch between tasks, so time will be saved.

• More and better machinery or capital can be employed.

• The ‘practice makes perfect’ argument that workers become more efficient or productive at the task they are doing, the longer they spend on the specialist task. However, this advantage can easily become a disadvantage if it involves ‘de-skilling’ and the development of boredom and alienation among workers.
  

trade

the buying and selling of goods and services

exchange

• to give something in return for something else received

• money is a medium of exchange

how does specialisation necessitate an efficient way of exchanging goods and services

• workers who completely specialise cannot enjoy a reasonable standard of living if forced to consume only what they produce.

• The obvious solution is to produce more than the worker actually needs, and then to trade the surplus for that produced by others.

• In rural communities in the UK in the past bartering was used as a double coincidence of wants is needed to barter

• using money as a medium of exchange is much more effective than bartering today as it avoids a double coincidence of wants

• money enables the economy to achieve much greater specialisation and division of labour than is possible with barter.
  

the short run

a time period where at least one factor of production is fixed

the long run

a time period where all factors of production are variable

marginal returns to labour

the change in the quantity of total output resulting from the employment of one more worker, holding all the other factors of production fixed.

total returns

the whole output produced by all the factors of production, including labour, employed by a firm.

law of diminishing returns

a short-term law which states that, as a variable factor of production is added to a fixed factor of production, both the marginal and eventually the average returns to the variable factor will begin to fall.

average returns to labour

total output divided by the total number of workers employed