4.1.4 Production, costs & revenue

What is production?

• where inputs (FOP) are converted into outputs (goods/services)

• production makes use of all factor inputs in producing goods or services

What does productivity mean?

• efficiency of production

What are the different forms of productivity?

• Labour productivity - output per worker (most common one referred to)

• Capital productivity - output per unit of capital

• Factor productivity - avg output of all FOP

How do you measure labour productivity?

Total output / number of workers

Example of labour productivity:

In 2014 a firm employing 2 workers produced 80 items per week. The same firm in 2015 employs 5 workers and produces 190 items per week.

What does the productivity gap refer to?

• difference in labour productivity between UK & its competitor countries

What is capital productivity?

• relationship between capital put into a business and the level of output of interest

What does land productivity refer to?

• compare two pieces of farmland: which yields the most wheat per acre per year, for instance

How do you measure capital productivity?

Total output/ total investment

How do you measure land productivity?

Total output/ area of land used

What is short-run production?

• ability to produce w/out having to increase fixed FOP

• (It may hire more or fewer workers, for instance, but doesn’t have to buy new machinery.)

What is long-run production?

• occurs when a firm changes the scale of all its factors of production

What is productive efficiency?

• when an economy uses minimum inputs to produce the maximum output at lowest cost

What is the equation for the average total cost?

Total cost/ output

What can productive efficiency be shown by?

• using an average cost curve diagram

What does the term economies of scale refer to?

• How decisions of individuals, producers and government can improve resource allocation

What can we see through economies of scale?

• productive efficiency is created when:

  • Purchasing economies lead to a reduction in costs

    o Specialisation can lead to a more efficient use of inputs

    o Better management can lead to increased output with the same factor inputs

What does the term diseconomies of scale mean?

• how decisions of individuals, producers and government can lead to a misallocation of resources

What can we see through diseconomies of scale?

productive inefficiency is created where resources are misallocated:

o Lack of communication between employees

o Lack of coordination by management

o Bureaucracy, occurs when large organisations, particularly government, have overly complex administrative procedures. This increases costs.