Productions, costs and revenue

Productivity

Output per unit of input (usually labour)

Production

The process or set of processes through which inputs are converted into outputs

Specialisation definition

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

• Different firms specialising in producing different goods or services

Division of Labour definition

The specialisation of individuals through the separation of tasks in the production process and their allocation to different groups of workers

Advantages of higher productivity

• Lower average costs

• Improved competitiveness and trade performance

• Higher profits

• Higher real wages 

• Economic growth

Short Run definition

At least one factor of production is fixed

Long Run

No fixed factors of production

Fixed Factor definition

An input that cannot be changed in the short run, but can be in the long run

Fixed Cost definition

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

Variable Cost definition

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

Total Cost = ...

Total Fixed Costs + Total Variable Costs

Economies of Scale definition

When an increase in the size of a fixed factor of production leads to a fall in the long-run average cost per unit

Production Capacity defintion

A measure of the total quantity that can be produced in a given period

Capacity Utilisation definition

The proportion of capacity that is actually used in a given period

Excess capacity definition

Arises where output is less than potential capacity

Unit Cost definition

The average cost per unit for a given quantity of output produced

Internal Economies of Scale definition

Arise from the growth of the business itself

Technical Economies of Scale

Large-scale businesses can afford to invest in expensive and specialist capital machinery e.g. Tesco can invest in tech that improves stock control. Might not be cost-efficient for a small corner shop to buy this tech

Marketing Economies of Scale and Monopsony Power

A large firm can spread its advertising and marketing budget over a large output and can purchase its inputs in bulk at negotiated discounted prices if it has monopsony (buying) power in the market e.g. major food retailer purchasing supplies from farmers 

Managerial Economies of Scale

Large-scale manufacturers employ specialists to supervise production systems and oversee human resources

Financial Economies of Scale

Larger firms are usually rated by the financial markets to be more 'credit-worthy' and have access to credit facilities, with favourable rates of borrowing

Network Economies of Scale

The marginal cost of adding one more user to the network is close to zero, but the resulting benefits may be huge because each new user to the network can then interact, trade with all of the existing members or parts of the network e.g. facebook

External Economies of Scale

Occur with the growth of an industry e.g. the development of research and development facilities in local universities that several businesses in an area can benefit from

Diseconomies of Scale definition

As output increases, long-run average cost increases

Reasons for diseconomies of scale

• Control - Monitoring the productivity from thousands of employees in big corporations is imperfect and costly and administration costs may rise as managers put in systems to monitor department's activities

• Co-operation - Workers in large firms may feel a sense of alienation and subsequent loss of morale if they do not consider themselves to be an integral part of the business leading to a fall in productivity

• Loss of control over costs - Big businesses may lose control over fixed costs such as expensive head offices and marketing costs. Also a risk that very expensive capital projects involving new tech may prove ineffective and leave the business with too much under-utilized capital

Do economies of scale always improve the welfare of consumers?

• Standardization of products - Mass production might lead to limiting the amount of consumer choice

• Lack of market demand - Market demand may be insufficient for economies of scale to be fully exploited leaving businesses with a lot of spare capacity

• Developing monopoly power - Businesses may use EoS to build up monopoly power -> higher prices, reduction in consumer welfare and loss of allocative efficiency

• Protecting monopoly power - EoS might be used as a barrier to entry - whereby existing firms can drive prices down if there is a threat of the entry of new suppliers