Production Costs and Revenues

• What does production convert inputs into?

  Final output
• What do the final outputs of production satisfy?

  Consumer needs and wants
• How is productivity calculated?

  Output per worker per period
• What does being less productive require?

  Larger input for the same output
• How can productivity be increased?

  By training workers or using advanced machinery
• What is the effect of being more productive on average costs?

  It lowers average costs per unit
• What does being more productive mean?

  Same input produces more output
• What are the key components of production and productivity?

  • Inputs: services of factors of production (capital and labor)
  • Final output: satisfies consumer needs and wants
  • Productivity: output per worker per period
  • Increased productivity: same input produces more output
  • Decreased productivity: larger input for same output
  • Methods to increase productivity: training and advanced machinery
  • Impact of productivity: lowers average costs per unit
• What occurs when each worker completes a specific task in production?

  Specialisation
• Who famously stated the concept of specialisation?

  Adam Smith
• How does the division of labour affect worker productivity?

  It can increase productivity
• What advantage do firms gain from increased efficiency?

  Lower average costs of production
• How many distinct operations are involved in making a pin according to Smith?

  Eighteen distinct operations
• What is the significance of dividing the production of pins into 18 tasks?

  It significantly increases output
• Who can achieve specialisation?

  Individuals, businesses, regions, or countries
• What are the advantages of specialisation?

  • Higher output and potentially higher quality
  • Greater variety of goods and services
  • More opportunities for economies of scale
  • Increased competition leading to lower costs
• What are the disadvantages of specialisation?

  • Repetitive work may lower motivation
  • Potential for structural unemployment
  • Decreased variety for consumers
  • Higher worker turnover rates
• What do countries trade to obtain?

  Goods and services they cannot produce
• What is comparative advantage?

  Producing a good at a lower opportunity cost
• What is absolute advantage?

  Producing more of a good with the same inputs
• What are the advantages of specialisation in countries?

  • Greater world output and economic welfare
  • Lower average costs due to competition
  • Increased supply of goods available
  • Outward shift in the PPF curve
• What are the disadvantages of specialisation in countries?

  • Overuse of non-renewable resources
  • Over-dependence on one commodity
• What is one function of money as a medium of exchange?

  Eliminates bartering problems
• What does money provide as a measure of value?

  A means to measure relative values
• What is a store of value in terms of money?

  Money holds its value over time
• How does money function as a method of deferred payment?

  Allows debts to be created for future payment
• What are the functions of money?

  • Medium of exchange
  • Measure of value (unit of account)
  • Store of value
  • Method of deferred payment
• What is fixed in the short run of production?

  At least one fixed cost
• How does the quantity of labour change in the short run?

  The quantity of labour might be flexible
• What is the difference in production scale between the short run and the long run?

  Short run has fixed scale; long run is flexible
• What is the marginal return of a factor?

  Extra output per extra unit of factor
• How does employing more staff in a small shop affect marginal return?

  It can lead to overcrowding and reduced output
• What is the average return of a factor?

  Output per unit of input over time
• What is the total return of a factor?

  Total output produced by units of factors
• When does the law of diminishing returns occur?

  Diminishing returns occur only in the short run
• What happens to the marginal return of labour over time?

  It falls as more labour is employed
• How does total output change with diminishing returns?

  Total output rises but at a slower rate
• What does the law of diminishing returns assume about factor resources?

  That firms have fixed factor resources in the short run
• How does outsourcing affect production flexibility?

  It allows firms to cut costs and be flexible
• What does returns to scale refer to?

  Change in output after increasing factor inputs