2.6 Production

• Individuals can be producers of non-market goods and services such as cleaning. Many of these producers work part time. Others are self-employed (e.g. plumbers) and keep all the profit.
• Firms can vary from small businesses up to MNCs. Small firms are usually involved in competition and larger firms are monopolies or oligopolies. Larger producers exert more power.
• Governments are producers of a range of services. Some of these include police, defence, education and healthcare (which can be provided by the public sector, but is unavailable to many).
• Production is defined as ''the total output of goods and services produced by a firm or industry in a time period''
• An advantage of increased production for the economy is that higher levels of production will increase output, and therefore sales, leading to a rise in profits. Firms now have more disposable income so can now fund employing more workers to accustom to the increased production. Unemployment falls, and therefore economic growth occurs from both increased output and less unemployment.
• A disadvantage of production for firms is that the firm may expand production/ output too much and incur diseconomies of scale. Additionally, if increased production/ output is caused by a rise in productivity then this may not lead to a rise in employment, so may not be that beneficial.
• In conclusion, whether or not a rise in production is beneficial for the economy will depend upon how big the rise in production is and how long it is sustained for, in order for it to have an impact.
• Productivity is defined as ''One measure of the degree of efficiency in the use of factors of production in the production process. It is measured in terms of output per unit of input.''
• An advantage of increased productivity for the economy is that it can lower firms' average costs. Increased productivity leads to a decrease in firms' average costs -> This, in turn, means firms can cut prices and therefore become more competitive. -> Firms additionally make greater profits allowing them to invest in capital equipment and in more research and development.
• A disadvantage of increased productivity: Higher productivity leads to a reduction of unit-labour costs (the cost of labour for every unit of output produced) which, in turn, lower's firms average costs of production. This, in turn, enables firms to lower prices. As a result firms become more internationally competitive. However, other countries may be unhappy and respond with retaliation such as introducing tariffs.
• In judgement, whether or not a rise in productivity is beneficial for the economy will depend upon how big the rise in productivity is. The larger the rise, the greater the impact on the economy.
• • Total cost is defined as ''All the costs of the firm added together''
  • Average cost is defined as ''The cost of producing a unit (the unit cost of productivity)''
  • Total revenue is defined as ''The total income of a firm from the sale of it's goods or services.''
  • Average revenue is defined as ''The revenue per unit sold''.
  • Profit is defined as ''When a firm's revenue is greater than it's costs'' (i.e. TR> TC). Total Revenue exceeds total costs.
  • Loss is defined as ''When a firm's revenue is less than it's costs'' (i.e. TR< TC). Total revenue is less than total cost.
• Calculations:

  Total cost = fixed cost + variable cost

  Average cost = Total cost/ Quantity

  Total revenue= Price x Quantity

  Average revenue = total revenue/ Quantity

  Profit= Total revenue- total cost

  Loss= Where revenue is less than cost (profit is -ve)
• An impact of costs for producers is that high costs of production would mean firms will have to increase prices in order to maintain profits. Firms may now lose contracts/ orders due to higher prices. *see diagram* Higher costs of production reduce profit and lower incentive to supply the product (S1 to S2). This leads to a higher price (P1 to P2) which, in turn, causes a contraction of demand (D1 to D2).
• Another impact of costs for producers is that higher costs of production will lead to reduced profits, meaning firms may have less money to re-invest into the business. However, this depends on productivity rises, which could lower average costs, making this not as significant.
• To conclude, the importance of costs of production for firms will depend upon the importance of other factors in determining profit, for example, total revenue.
• Revenue is important for producers because without revenue, firms will be unable to cover their costs of production whilst making a profit as well and may close down. This would also lead to an increase in unemployment, as firms will need to fire their workers in order to make sufficient profit, by cutting costs of production, or if they close down, then a whole workforce will be unemployed, and overall will restrict economic growth.
• Revenue may not be as important for firms, as it depends how significant any change in revenue is. The bigger the change, the more important it is likely to be. For example, sudden lower revenues would lead to a rapid decrease in profits made and as a result, a major decrease in supply. *see diagram* A rise in costs of production, with low revenue, will lead to a decrease in supply (S1 to S2), which in turn will cause an increase in price (P1 to P2), and therefore a decrease in quantity demanded (D1 to D2).
• To conclude, the importance of revenue for firms will depend upon the significance of the revenue change.
• Profit is important for firms because it provides signals to businesses as to where to allocate scarce resources. For example, a rise in profits means firms will reallocate scarce resources and, in turn, firms will then produce what consumers want. This is known as 'allocatively efficient'.
• Loss is also important for firms. In the short run, firms can sustain losses for a short period of time, as long as they can cover the 'variable costs' (costs which vary as output changes), then they will continue in business. But, sustained losses over a period of time will result in businesses closing down.
• Overall, the importance of profits and losses for firms will depend upon how significant these are and how long the losses remain in place for.
• Economies of scale is defined as ''the cost advantages a firm can gain by increasing the scale of production, leading to a fall in average costs''.
• • Internal Economies of Scale is where the firm grows itself and increases individual output.
  • External Economies of Scale is where the industry the firm is part of expands (even if the firm itself doesn't expand) e.g. Improvements in transport links like better roads.
• The 4 types of Economies of Scale are: Technical, Managerial, Financial, and Purchasing.
• Economies of Scale is important for firms because larger Economies of Scale means firms will enjoy lower AC's. This, in turn, allows firms to cut their prices, and therefore become more price competitive in a competitive market.

  Alternatively, having gained lower AC's, firms can increase profits and, in turn, increase spending in research and development. This means new, innovative products or new production techniques.
• Analysis of purchasing economies:

  As firms get larger they benefit from discounts gained from buying products in greater bulk: 'bulk buying'. E.g. if a hotel chain had to buy toilet roll for 100 hotels rather than just 1, then it will negotiate a larger discount. Overall, whilst total costs rise average costs of production will fall.
• Analysis of financial economies:

  This is all about risk. Usually the larger the firm, the more assets it owns. Many banks will see lending to such firms as involving less risk because they have the assets to sell if needed. Therefore, if such firm wants to borrow money, it will be able to do so at a much lower interest rate than a smaller firm can. (More risk with smaller firms).

  With larger firms enjoying lower interest rates as output rises, they will also incur lower average costs.