Economics: Production, Costs and Revenue

What can cause diseconomies of scale?

'Law of Diminishing Marginal Returns' A law of economics stating that, as the number of new employees increases, the marginal product of an additional employee will at some point be less than the marginal product of the previous employee.

What is economy of scale? What is diseconomy of scale?

- Economy of Scale: as output increases, long-run average cost of production falls due to an increase in the size or scale of the firm. - Diseconomy of Scale: as output increases, long-run average cost rises.

What are fixed costs? What are variable costs? What is total cost? What is average cost?

- Fixed Costs: cost of production which, in the short run, does not change with output. - Variable Costs: cost of production which changes with the amount that is produced, even in the short run. - Total Cost: the whole cost [fixed + variable] of producing a particular level of output. - Average Cost: total cost of production divided by output.

What is an internal economy of scale? What is an external economy of scale?

- Internal: cost saving resulting from the growth of the firm itself - External: cost saving resulting from the growth of the industry or market of which the firm is part.

What is long run average cost?

- LRAC is long-run total cost divided by output.

What are reasons for diseconomies of scale?

- Managerial diseconomies of scale (inexperienced managers) - Communication failure (too many layers of organisation) - Motivational diseconomies of scale

What are other types of economy of scale?

- Managerial: the larger the scale of a firm, the greater the benefit of division of labour and specialisation within management. - Marketing: two types - bulk-buying and bulk-marketing. Large firms can use market power both the buy supplies at lower prices and negotiate with retailers/wholesalers at better terms. - Financial: large firms can often borrow from banks and other financial institutions at a lower rate of interest and on better terms than those available to smaller firms. - Risk-bearing: large firms exposed to less risk as they can be grouped or spread. They can spread risks by diversifying their output/markets/sources of supply/finance/manufacturing process. This can make them less vulnerable to sudden changes in demand or conditions of supply. - Economies of Scope: factors that make it cheaper to produce a range of products together than to produce each of one of them on its own. Eg businesses sharing centralized functions, such as finance or marketing.

What is productivity and what are the types? What is the productivity gap?

- Productivity: Output per unit of Input. - Labour Productivity: Output per worker. - Capital Productivity: Output per unit of capital. - Productivity Gap: The difference between labour productivity in the UK and in other developed economies.

Define short-run production and long-run production.

- Short-Run Production: occurs when a firm adds variable factors of production to fixed factors of production. - Long-Run Production: occurs when a firm changes the scale of all the factors of production.

What is specialization? What is Division of Labour? Why does this increase productivity?

- Specialisation: a worker only performing one task or a narrow range of tasks. Also, different firms specializing in producing diff goods or services. - Division of Labour: different workers perform diff tasks in the course of producing a good or service. Why does this increase productivity? - A worker will not need to switch between tasks, so time will be saved. - More and better machinery or capital can be employed. Investment. - The 'practice makes perfect' argument that workers become more efficient or productive at the task they are doing, the greater the time spent on the specialist task. This can have the opposite effect of reducing productivity due to boredom and alienation among workers.

What is a technical economy of scale? What are the main types?

- Technical Economy of Scale: a cost saving generated through changes to the 'productive process' as the scale of production and the level of output increase. Types: - Indivisibilities - many types of plant or machinery are indivisible in the sense that there is a certain minimum size below which they cannot efficiently operate. - The spreading of research and development costs - with large plants, research and development (R&D) costs can be spread over a much longer production run, reducing unit costs in the long run. - Volume Economies - with many types of capital equipment, costs increase less rapidly than capacity. - Economies of massed resources - operation of a number of identical machines in a large plant means that proportionately fewer spare parts need to be kept than when fewer machines are involved. - Economies of vertically linked processes - manufacturing activity involves a large no of vertically related tasks/processes, from purchase of raw materials/components/energy to completion and sale. The linking of processes in a single plant can lead to saving time/transport costs/energy.

Explain short-run and long-run production.

- The short run is the time period in which at least one factor of production is fixed and cannot be varied. - The long run is the time period in which no factors of production are fixed and in which all the factors of production can be varied.

What is total revenue? What is average revenue?

- Total Revenue: all the money received by a firm from selling its total output. - Average Revenue: total revenue divided by output; in a single-product firm, average revenue equals the price of the product. AR = total revenue(TR) / output (Q)

What is trade? What is exchange?

- Trade: the buying and selling of goods and services. - Exchange: to give something in return for something else received. Money is a medium of exchange.

How do you calculate total profit?

Total Profit = total revenue - total costs