production, costs, revenue

• PRODUCTION_COSTS_REVENUE

  • Production and productivity
  • Specialisation, Division of labour and exchange
  • Law of diminishing returns and returns to scale
  • Costs of production
  • Economies and diseconomies of scale
  • Marginal, average and total revenue
  • Profit
  • Technological change
• Production


  Converts the inputs of the factors of production such as capital, labour etc into final output
• Productivity

  Output per unit of input per period of time
• Labour productivity

  Output per worker
• Capital productivity

  Output per unit of capital
• Firm

  Productive organisation which sells its output goods/services
• Specialisation


  • Worker only performs one task
  • Different firms specialising in producing different goods/services
• Division of labour

  Different workers perform different tasks in the course of producing a good/service
• Benefits of specialisation and division of labour

  • Worker will not need to be changed b/w tasks- time saved
  • More and better machinery/ capital can be employed
  • Practise makes perfect- workers become more efficient/productive at the task if they spend more time on the specialist task
• Downside of specialisation

  • Worker can become bored and alienated from other workers
• Trade

  Buying and selling of goods and/or services
• Exchange

  To give something in return for something else received
• Why is trade and exchange necessary for those taking part in division of labour for specialisation to be worthwhile?
• Short run

  Time period in which at least 1 factors of production is fixed
• Long run

  Time period in which all factors of production can be varied
• Law of diminishing returns

  As a variable factor of production is added to a fixed factor of production, eventually both the marginal and average returns to the variable factor of production will fall
• Marginal returns

  Additional output gained from employing one more unit of a resource
• Average returns

  Represent the total output of the labour force divided by number of workers employed
• Total returns

  Overall output gained from the combined use of all units of a particular resource (FoP)
• Returns to scale

  Rate by which output changes if the scale of all the factors of production is changed
• Increasing returns to scale

  When the scale of all the FoPs employed increases, output increases at a faster rate
• Constant returns to scale

  When the scale of all the FoPs employed increases, output increases at the same rate
• Decreasing returns to scale

  When the scale of all the FoPs employed increases, output increases at a slower rate
• Short-run costs

  Made up of fixed costs and costs incurred when hiring the services of the variable FoPs
• Long run cost

  Always variable costs
• Fixed costs

  Costs of production, in the short run, does not change with output
• Variable costs


  Cost of production which changes with output, even in short run
• Total cost


  All the costs incurred when producing a particular size of output
• Average variable cost

  Total variable cost divided by the size of output
• Marginal cost

  Addition to total cost from producing one extra unit
• How do factor prices affect firms' cost of production?

  Higher prices increase overall cost of production
• How do factor prices affect firms' choice of factor inputs?

  If wages are low compared to capital costs- a labour-intensive approach might be more effective
• How does productivity affect a firms costs of production?

  Higher productivity means that more output is generated per unit of input, leading to lower average costs. Conversely, lower productivity can result in higher average costs, as more input is required for each unit of output.
• How does productivity influence their choice of factor inputs?

  If one factor is more productive than another, the firm may opt to allocate resources to the more productive factor to achieve cost efficiency. For example, if capital is highly productive compared to labor, a capital-intensive production method may be chosen to minimize costs.
• Economies of scale

  As long run average cost of production falls, output increases
• Diseconomies of scale

  As long run average cost of production increases, output increases
• Internal economies and diseconomies of scale

  Changes in long run average costs of production resulting from changes in the sizde of firm
• External economy of scale

  A fall in LRAC of production resulting from the growth of the market/industry of which the firm is a part
• External diseconomy of scale


  Increase in LRAC of production resulting from the growth of the market/industry of which the firm is a part
• Types of Internal economies of scale

  • Technical
  • Managerial
  • Marketing
  • Financial
  • Risk-bearing
  • Economies of scope