4. Production, Costs and Revenue

• Production is the process of converting inputs (factors of production) into outputs (goods and services)
• Labour productivity is a measure of output per worker or per hour worked
• higher labour productivity = lower unit costs = competitive advantage
• specialisation is when a person, firm, or country focuses on producing a specific good/service
• division of labour is breaking production into stages for efficiency
• advantages of division of labour:

  • increased output and efficiency
  • workers become skilled at tasks
• disadvantages of division of labour:

  • bordem
  • over-reliance on some workers
  • reduced flexibility
• increasing returns - output rises faster than input
• diminishing returns - output rises but slower than the input increases
• negative returns - output falls as input increases
• Diminishing marginal utility means that as a person consumes more of a good, the extra satisfaction per unit decreases
• Diminishing marginal returns occur in the short run when adding more of a variable of input leads to a decline in output
• average costs = total costs / quantity
• average fixed costs = fixed costs / quantity
• Average variable costs = Variable costs / quantity
• Marginal costs is the cost of producing one extra unit
• Marginal costs = change in total costs / change in quantity
• Revenue = price x quantity
• Average revenue = total revenue / quantity
• Marginal revenue is the change in total revenue from selling one more unit
• Perfectly competitive market = average revenue = marginal revenue = price
• Imperfect market = marginal revenue > average revenue because price decrease to sell more units means decreased revenue per unit