Production, costs, revenues and profit

What is production?

The process of creating goods and services to satisfy needs and wants.

What is productivity?

The output per unit of input, such as output per worker per hour.

Why is productivity important?

It helps lower costs and increase competitiveness.

What is cost in economics?

The money spent by a firm in the production process.

What are fixed costs?

Costs that do not change with the level of output (e.g., rent).

What are variable costs?

Costs that change with the level of output (e.g., raw materials).

What are total costs?

The sum of fixed and variable costs.

What is the formula for total cost?

Fixed costs + variable costs.

What is average cost?

Total cost divided by the number of units produced.

What is the formula for average cost?

Total cost ÷ output.

What is revenue?

The money a firm earns from selling goods and services.

What is total revenue?

Price × quantity sold.

What is average revenue?

Total revenue ÷ quantity sold (equal to price in most cases).

What is profit?

The difference between total revenue and total costs.

What is the formula for profit?

Total revenue – total cost.

What happens if a firm’s total costs are higher than its total revenue?

It makes a loss.

Why is profit important for producers?

It can be reinvested, used to reward owners, and provides an incentive.

What are internal economies of scale?

Cost advantages gained by a firm as it grows in size.

Name some examples of internal economies of scale.

Buying in bulk, financial economies, managerial expertise, and technical efficiencies.

What are external economies of scale?

Cost benefits that all firms in an industry gain as the industry grows.

What is an example of an external economy of scale?

A skilled local labour force or improved infrastructure.

What happens to average costs when a firm experiences economies of scale?

Average costs fall as output increases.

What are diseconomies of scale?

When a firm becomes too large and average costs start to rise.

What causes diseconomies of scale?

Poor communication, coordination problems, and reduced motivation.

How can higher productivity affect costs and profits?

It lowers average costs and can increase profit margins.

Why might a firm aim to increase production?

To grow, benefit from economies of scale, and increase revenue.

What are the benefits of producing more efficiently?

Higher profits, lower prices, and improved competitiveness.