4 ~ Production, costs and revenue (KEY TERMS)

ECON AQA alevle

Production

Converts inputs or factor services into outputs of goods and services

Factors of production

Inputs into the production process

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

Firm

A productive organisation which sells its output of goods and/or services commercially

Specialisation

A worker only performing one task or a narrow range of tasks. Also, 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

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

Marginal returns of 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

Law of diminishing marginal returns

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

Total returns

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

Average returns of labour

Total output divided by the total number of workers employed

Returns to scale

The rate by which output changes if the scale of all the factors of production is changed

Plant

An establishment, such as a factory, a workshop or a retail outlet, owned and operated by a firm

Increasing returns to scale

When the scale of all the factors of production employed increases, output increases at a faster rate

Constant returns to scale

When the scale of all the factors of production employed increases, output increases at the same rate

Decreasing returns to scale

When the scale of all the factors of production employed increases, output increases at a slower rate

Fixed cost

A cost of production which, in the short run, does not change with output

Variable cost

A cost of production which changes with the amount that is produced even in the short run

Total cost

All the costs incurred when producing a particular size of output

Average variable cost

Total variable cost divided by the size of output

Marginal cost

Addition to total cost resulting from producing one additional unit of output

Average fixed cost

Total cost of employing the fixed factors of production to produce a particular level of output, divided by the size of output: AFC = TFC/ Q

Average total cost

Total cost of producing a particular level of output divided by size of output: ATC = AFC + AVC

Economies of scale

As output increases, long run average cost falls

Diseconomies of scale

As output increases, long run average cost rises

Internal economies and diseconomies of scale

Changes in long run average cost of production resulting from changes in the size or scale of a firm or plant

External economy of scale

A fall in long run average costs of production resulting from the growth of the market or industry of which the firm is a part

External diseconomy of scale

An increase in long run average costs of production resulting from the growth of the market or industry of which the firm is a part

Total revenue

All the money received by a firm from selling its total output

Average revenue

Total revenue divided by output

Marginal revenue

Addition to total revenue resulting from the sale of one more unit of the product

Perfect competition

A market that displays the six conditions of: a large number of buyers and sellers; perfect market information; the ability to buy or sell as much as desired at the ruling market price; the inability of an individual buyer or seller to influence the market price; a uniform or homogeneous product; and no barriers to entry or exit in the long run

Monopoly

One firm only in a market

Price taker

A firm which is so small that it has to accept the ruling market price. If the firm raises its price, it loses all its sales; if it cuts its price, it gains no advantage

Price maker

When a firm faces a downward sloping demand curve for its product, it possesses the market power to set the price at which it sells the product

Quantity setter

When a firm faces a downward sloping demand curve for its product, it possesses the market power to set the quantity of output it wishes to sell

Profit

The difference between total sales revenue and total cost of production

Profit maximisation

Occurs at the level of output at which total profit is greatest

Normal profit

The minimum profit a firm must make to stay in business, which is insufficient to attract new firms into the market

Abnormal profit

Profit over and above normal profit

Technological change

A term used to describe the overall effect of invention, innovation and the diffusion or spread of technology in the economy

Invention

Making something entirely new; something that did not exist before at all

Innovation

Improves on or makes a significant contribution to something that has already been invented, thereby turning the results of invention into a product

Productive efficiency

For the economy as a whole, it occurs when it is impossible to produce more of one good without producing less of another. For a firm, it occurs when the average total cost of production is minimised

Dynamic efficiency

Measures improvements in productive efficiency that occur in the long run over time

Monopolistic competition

A market structure in which firms have many competitors, but each one sells a slightly different product

Duopoly

Two firms only in a market

Creative destruction

Capitalism evolving and renewing itself over time through new technologies and innovation replacing older technologies and innovations