Production, Cost and Revenue

• Production: the rate of output in which a good or service is produced.
• Productivity: efficiency output per unit of input used.
• Specialisation - the concentration of production on a narrow range of goods and services
• Division of labour - breaking down the production process into seperate task so that each worker can specialise in one area
• automation: the process by which machine control other machines
• constant returns to scale: when output increases by an equal proportion to the increase in inputs
• economies of scale: where LRAC falls as output increases
• diseconomies of scale: where LRAC increases as output increases
• Law of diminishing returns: the rate of profit from an investment, after a certain point, cannot continue to increase if other variables remain at a constant.
• Short run - when there is atleast one fixed factor of production
• Long run - when all factors of production are variable
• Variable cost - costs varying with output
• Fixed cost - costs that do not vary with output
• Economies of Scale ( EoS ) has 2 factors:

  • Internal EoS (within a business)
  • External EoS (within the industry)
• Internal EoS factors: Really, Fun, Moms, Try, Making, Pies

  • Risk bearing
  • Financial
  • Managerial
  • Technical
  • Marketing
  • Purchasing
• Minimum Efficient Scale (MES): The smallest level at which a firm can operate profitably, occurs just before the graph flattens into constant return to scale
• Internal EoS factors: Really, Fun, Moms, Try, Making, Pies

  • Risk bearing - firms can spread the opportunity cost over a larger range of output
  • Financial - firms can negotiate lower rates of interest as firms are bigger and more reputable
• Internal EoS factors: Really, Fun, Moms, Try, Making, Pies

  • Managerial - as more specialised managers are employed, their skills are brought thus increasing output levels higher than costs
  • Technical - more specialist workers/machinery boost productivity higher than costs
• Internal EoS factors: Really, Fun, Moms, Try, Making, Pies

  • Marketing - firms are able to bulk buy adverts
  • Purchasing - firms are able to buy raw materials in bigger bulks and negotiate unit discounts
• External EoS: Reduce costs

  • Better transport infrastructure
  • component supplies move closer
  • Research & Development firms move closer
• Diseconomies of Scale factors: 3C's and a M

  • Communication
  • Control
  • Coordination
  • Motivation
• Diseconomies of Scale:

  Control - as firms become larger, managers have a larger span of control thus allowing a few workers to slack

  Communication - as firms become larger, information can take time and effort to be passed around
• Diseconomies of Scale:

  • Coordination - as departments grow collaboratively working at the same rate becomes more difficult therefore reducing productivity
  • Motivation - as firm size grows individuals feel less important and therefore motivation/productivity falls
• Increasing returns to scale ( IRS ) - output increases by greater proportions than input
• Decreasing returns to scale ( DRS ): output increases by smaller proportions than input