4.1.4 Production Costs and Revenues

• Production converts inputs, or the services of factors of production such as capital and labour into a final output
• Productivity: a measurement of the rate of production by one or more factors of production
• Labour productivity is the output per worker per unit of time
• The four factors of production are land, labour, capital and entrepreneur
• In the short run, one or more factors of production is held fixed in supply
• The reward for land is rent
• The reward for labour is wages
• The reward for capital is interest
• The reward for entrepreneur is profit
• Labour productivity can be affected by technology, investment in training, the quality of management, investment in new capital, the quality of national infrastructure and level of demand for a product in the market - using up spare capacity
• Specialisation is when a worker focuses on a specific task / product
• Specialisation can happen within a country, a region and a business
• Specialisation within a country example: Bangladesh is a major producer and exporter of textiles, USA is the leading shale oil and gas supplier
• The division of labour occurs when a production process is split into separate tasks, each of which is carried out by a different worker / group
• Division of labour can increase output per worker as they become more efficient at the task due to repetition.
• Increasing productivity can lower the supply costs per unit, as the worker can produce more in the same time frame, with the same hourly wage. This could be past onto the consumer
• Division of labour can be unrewarding and repetitive, causing boredom and lower motivation which can affect productivity
• Lower motivation in work can affect quality of work
• Boredom at work could cause a high turn over of workers, meaning people will have to be retrained regularly.
• Repetitive jobs are usually low paid require low skilled. If worker find themselves out of work then they may suffer from structural unemployment and occupational immobility.
• Law of diminishing returns: in the short run as successive units of the variable factor (eg. labour) are added to the fixed factor (eg. land) the initial marginal product will rise but a some point the optimum capacity is reached. First marginal product falls, then average. Total product will increase at an increasing rate, then increase at a decreasing rate. Total product will only fall if marginal product is negative
• Short run total cost = short run variable cost + short run fixed costs
• Short run average total costs = short run average variable costs + short run average fixed costs
• Short run average total costs = short run total costs / quantity outputted
• Short run average variable cost = short run variable cost / quantity outputted
• Short run average fixed costs = short run fixed cost ./ quantity outputted
• marginal costs = dTC/ dQ
• The envelope curve

  
• Productive efficiency is at the minimum of the LRAS
• The minimum efficient scale is the minimum size factor needed to be a the productive efficient point
• Technical economies of scale is being able to spread out the high fixed costs of large capital equipment
• Price economies of scale, bulk buying: lower average cost for buying large quantities. Total costs will rise, but cost per unit will fall
• Marketing economies of scale: National ad campaigns are more efficient as the cost is spread across more products from higher sales.
• Risk bearing: bigger firms are more likely to survive downturns eg. recessions.
• Financial economies of scale : larger firms get a lower interest rate from banks as the risk is lower
• Container principle: increase in surface area leads to a double increase in volume.
• Economies of scope occur when a large firm uses its existing resources to diversify into related markets. Eg. a firm producing in soft drinks could use its marketing and distribution network to start producing alcoholic drinks
• Diseconomies of scale : long run average costs rise as output increases
• Reasons for diseconomies of scale:

  1. Poor communication in large firms - hard to share new ideas and working practices
  2. Alienation: Specialisation and the division of labour can be boring, causing demotivated workers and decrease productivity
  3. Lack of control: with a large number of workers it can be difficult for managers to notice shirking
• Returns to scale is the technical engineering relationship showing hoe inputs convert to outputs. This has nothing to do with costs