Production costs and revenue

• Allocative efficiency occurs when the resources are allocated to the most efficient use. No one can be made better off without making someone else worse off. All points that lie on the PPF are allocatively efficient.
• Productive efficiency is achieved when a firm is producing at the bottom of the AC curve.
• Firms which are researching in development and innovation achieve Dynamic efficiency . Product innovation can include improving quality and investment in technology. Industries with high levels of research and development are dynamically efficient.
• Social efficiency occurs when all costs / benefits of an economic activity are taken into account. Marginal social cost = marginal social benefit.
• Specialisation occurs when a product or task is concentrated on, allowing firms/industries/regions to become more efficient and reduce their average costs of production.
• Division of labor occurs when production is broken down into several smaller tasks, increasing output per person as people become proficient through repetition. Increased productivity will decrease cost of supply per unit theoretically this will lead to lower prices for goods and services.
• Key advantages of specialisation.

  • Increased output of workers helps resolving basic economic problem.
  • Reduction in average costs of production should result in lower consumer prices, due to this there is a wider range of quality goods and services.
  • Reduces opportunity cost as a nation specialises in a good/service.
  • GDP should increase e.g Ghana specialising in cocoa causing it to be the largest driver of Ghana's growth in long run.
  • Developed nations tend to specialise in high value production e.g pharmaceuticals and banking.
• Disadvantages of specialisation

  • Monotonous work = demotivated workforce = increased absenteeism
  • Possible reduction to dynamic efficiency
  • An over reliance on imports from other specialised nations
  • Over reliance on demand for a service/good e.g UK GDP reduction due to less finance/banking demand during covid.
  • Transportation costs - enviromental damage
• Economies of scale occurs when the average cost of producing a good decreases as quantity produced increases. This means that larger businesses have lower average costs than small ones. Economies of scale can also occur within industries and countries.
• How a business gains lower average costs of production

  1. Research and development

  2. Financial

  3. Marketing

  4. Technological

  5. Managerial

  6. Bulk buying
• Factor of economies of scale ( R )

  Research and development


  Firms that have high R+D will be more dynamically efficient
• Factor of economies of scale ( F )

  Financial


  Firms which are larger can easily take out loans as they are a lower risk
• Factor of economies of scale ( M )

  Marketing


  Costs of marketing can be spread over a wider output
• Factor of economies of scale ( T )

  Technological


  Large portions of industry heavy firms costs are machinery. Technological innovation may reduce this
• Factor of economies of scale ( M )

  Managerial


  Larger firms have specialised management, greater efficiency
• Factor of economies of scale ( B )

  Bulk buying


  Larger organisations benefit from lower unit prices due to larger deals
• Factors of economies of scale

  ( Really Fantastic Mums Try Making Buns )

  R - Research and development

  F - Financial

  M - Marketing

  T - Technological

  M - Managerial

  B - Bulk buying
• Producer surplus. The additional amount raised by firms from what they were willing to sell at. Located below the equilibrium price.
• Consumer surplus. The difference between what consumers are willing to pay and what they actually pay. Located above the Equilibrium Price.
• At market equilibrium price both consumers and producers surplus are maximised. Allocative efficiency is reached.
• Rationing function - When there is a shortage of a good/service the price will increase, reducing the amount consumers are ready, willing and able to buy.
• incentive function - through consumer choice firms are incentivised to increase/decrease output without need for govt intervention.
• Signalling function - market signals are sent to indicate the amount of resources that should be allocated to different uses