2.6 Production

• What is production in economic terms?

  Total output of goods and services produced by a firm or industry in a period of time
• What does GDP stand for and what does it measure?

  Gross Domestic Product; total value of all goods and services produced in an economy in a year
• How does an increase in production affect GDP?

  Increase in production leads to an increase in GDP
• What is the relationship between GDP and standard of living?

  Increase in GDP leads to an improvement in standard of living
• What are economies of scale?

  Cost advantages a firm gains by increasing the scale of production, leading to a fall in average costs
• What is productivity in economic terms?

  Measure of the degree of efficiency in the use of factors of production in the production process
• What is the formula for productivity?

  Productivity = Total output / Total input
• What are the benefits of increased productivity?

  Higher wages, increased standard of living, internationally competitive, increased total output, lower average costs, greater exports, higher profits
• What are fixed costs?

  Costs that do not change with output
• What are variable costs?

  Costs that change with output
• What is the formula for total costs?

  Total costs = Total fixed costs + Total variable costs
• What is average cost?

  Cost per unit produced
• What is the formula for average cost?

  Average cost = Total cost / Quantity
• What is total revenue?

  Total income of a company from the sale of its goods and services
• What is the formula for total revenue?

  Total revenue = Price x Quantity
• What does it mean if TR > TC?

  Profit increases
• What does it mean if TR = TC?

  Break-even point
• What does it mean if TR < TC?

  Loss of profit
• What are the implications of strong revenues for a firm?

  Ability to invest more, secure loans, pay suppliers, and maintain employee confidence
• Why is profit important for a firm?

  Generates finance for investment, attracts more resources, signals to other producers, supports healthy cash flow
• What are the benefits of increased productivity for different stakeholders?

  • Individuals: Higher wages, increased standard of living
  • Firms: Lower average costs, greater exports, higher profits
  • Government: Increased total output
  • Economy: Internationally competitive
• What are the different types of costs a firm faces?

  • Fixed costs: Do not change with output (e.g., rent, insurance)
  • Variable costs: Change with output (e.g., raw materials, wages)
  • Total costs: Sum of fixed and variable costs
  • Average costs: Cost per unit produced
• What are the implications of different revenue and cost scenarios for a firm?

  • TR > TC: Profit increases
  • TR = TC: Break-even point
  • TR < TC: Loss of profit
• What are the implications of strong revenues for a firm?

  • Ability to invest more
  • Secure loans
  • Pay suppliers
  • Maintain employee confidence
• Why is profit important for a firm?

  • Generates finance for investment
  • Attracts more resources
  • Signals to other producers
  • Supports healthy cash flow