Production Costs and Revenue

Short Run

The time period where at least 1 of the factors of production is in fixed supply, in most cases these fixed factors are Land and Machinery.

Long Run

A time period where all of the factors of production are variable.

Law of Diminishing Returns

If one variable factor is increased but another is fixed (short term) then the resultant increase in output will be less for each unit of input added.

Marginal Returns of Labour

The change in quantity of total output due to the employment of 1 additional worker.

Increasing Marginal Returns of Labour

Likely to occur when a small Labour force expands, as all workers can now specialise, leading to greater maginal returns.

Dimishing Marginal Returns of Labour

After the point where Marginal Returns peaks, the additional units of labour will not have sufficient work to do and thus the marginal return decreases.

Returns to Scale

The responsiveness of a change in the output of a business to a change in the factor inputs.

Economies of Scale

The cost advantage of expansing scale of production in the long run (where average cost decreases as output increases).

Purshasing Economies of Scale

Where large firms can purchase materials in bulk, getting a lower rate per unit than other customers.

Selling Economies of Scale

All types of marketing have costs, normally fixed meaning the more untis the more that fixed quantity is divided by.

Managerial Economies of Scale

As firms grow managers can divide labour between workers, leading to specialisation and greater productivity.

Financial Economies of Scale

Firms with a greater reputation are seen as being less risky to loan money to, allowing them to get loans at lower interest rates.

Technical Economies of Scale

Larger businesses have access to advanced machinery, making them more productive.

Research Economies of Scale

Large firms can invest in R&D, allowing them to develop and improve their existing products.

Risk-Bearing Economies of Scale

Large Firms can produce a range of products across several markets, allowing them to continue operating even if one of these products fails.

Economies of Scope

Where it becomes cheaper to produce several different products instead of specialising in just a few.

Managerial Diseconomies of Scale

As companies expand across multiple time zones there become several time lags on communication, reducing company efficiency.

Average Fixed Cost Curve

A firm’s fixed cost divided by the output, they fall as output increases because they are spread across more output.

Average Variable Cost Curve

Overall variable costs divided by the unit output of a firm, they begin to until they reach a minimum point before rising again.

Average Total Cost Curve

A curve created by adding the fixed and variable cost curves, it is the total cost of production divided by the units output.

Marginal Cost

The cost to a firm of producing one additional unit of output, it cuts the ATC Curve at its lowest point.

Total Revenue

All the money a firm earns from selling the total output of a product.

Marginal Revenue

The additional revenue resulting form the sale of an additional unit of output.

Perfect Competition

Within this market structure MR and AR are equal as every firm is a price taker meaning the price remains constant within the market.

Monopoly

Within this market structure the Average Revenue is equivalent to the demand curve, they either set the price they sell a good at or the quantity of the good they sell.

Profit

Total revenue - Total cost, it’s the difference in money a company has before and after selling a produced good.

Profit Maximisation

Firms want to make the most money possible, and do this by producing at the point where MR=MC as beyond this point the cost of each additional unit is higher than the reveneue it produces.

Normal Profit

The minimum level of profit necessary for existing firms to survive, it is the revenue earned by a business - their explicit (direct) costs and their implicit (opportunity) costs.

Abnormal (supernormal) profit

Additional Profit earned beyond normal profit. In the long run and in the absence of entry barriers these profits attract new firms into the market in the long run.

Invention

The creation of something which previously did not exist.

Innovation

The improvent of something that has already been invented, making it into a marketable product.

Mechanisation

Where humans operate machines that are used in production.

Automation

Where machines operate machines, such as computer controlled robots.

Disruptive Innovation

Innovation that helps create a new market whilst disrupting an existing market over years or decades.

Sustaining Innovation

Innovation that helps to develop an existing market, enabling firms within a market to offer better value.