Micro 23- Production costs and revenue

• Total revenue

  total sales a firm receives over a given period of time
• Marginal revenue

  the amount that one more unit sold will increase by

  MRn = Trn -(Trn -1)
• Normal profits

  Ac = Ar

  profits required to keep the entrepreneur/ firm in the industry
• Supernormal profits

  profits additional to those required to keep the firm operating in the industry

  MR > MC
• What is the importance of profit

  1. reward for entrepreneurs = incentivise investment
  2. Source of finance for investment
  3. Signals firms to enter market
  4. signals health for the macro economy
• What is productivity and importance of productivity?

  • output per worker per period of time
  • leads to a fall in average cost per unit
• What is specialisation?

  • each worker completes a specific task in a production process
  • leads to increased efficiency = fall in average cost of production
• Pros of specialisation

  • increased output + higher quality
  • Economies of scale
  • increased competitiveness = incentivises firms to lower costs
• Cons of specialisation

  • repetitive
  • structural unemployment since no transferable skills
  • increased labour turnover = dissatisfaction of jobs
• What are the functions of money?

  1. medium of exchanges
  2. a store of value
  3. method of deferred payment
• What is law of diminishing returns ?

  • as variable factors of production are added to a stock of fixed factors of production labour becomes less productive over time
• Describe what happens during diminishing returns?

  1. initially the output increases due to specialisation of labour and underutilisation of capital
  2. as more variable factors of production are added to fixed FOP each additional unit of labour brings in less output than the previous worker
  3. marginal product falls since fixed factors of hinder production
• What are increasing returns to scale?

  when output increases by a greater proportion to the inputs
• What is decreasing returns to scale?

  when a firms output increases less proportionally than its increase in inputs
• What are the different internal economies of scale?

  • financial
  • managerial
  • purchasing
  • technological
  • marketing
  • risk bearing
• What are external economies of scale?

  Economies of scale that occur within an industry
• What are diseconomies of scale?

  past a certain point the average cost per additional unit of output produced
• What are the different diseconomies of scale?

  control- harder to monitor how productive the workforce is as firms grow

  coordination- hard to coordinate every worker

  communication- workers feel excluded
• What is the difference between invention and innovation?

  invention is the creation of new products whereas innovation is the act of improving or contributing to existing products
• Impact of tech changes

  • increased efficiency and productivity
  • better quality
  • creating new products = destruction of existing markets
  • changes structure of markets
• What is creative destruction?

  • new entrepreneurs innovate which challenges existing firms
  • more productive firms grow whereas less productive firms are forced to leave the market
  • This leads to an increase in the economy's productive potential