Production costs + revenues
Production + productivity
Production
Converts inputs into a final output. This satisfies consumer needs + wants.
Productivity
Output per worker per period of time.
Being more productive means the same input produces more output, over
the same period from e.g. training or machinery which lowers costs per unit.
Specialisation, division of labour and exchange
Specialisation
When each worker completes a specific task in a production process.
Through the division of labour, productivity can increase + lower costs.
Advantages:
● Higher output + quality
● Maybe a greater variety
● Economies of scale
● Lowers costs to keep prices down
Disadvantages:
● Work becomes repetitive
● Untransferable skills
● Higher staff turnover
Countries can specialise + exploit their comparative advantage.
Advantages:
● Greater world output
● Lower costs from more competition
● More choice
● Outward shift in the PPF curve
Disadvantages:
● LICs might use up non-renewable resources too quickly
● Over-dependence on a single export
The law of diminishing returns and returns to scale
In the short run, the scale of production is fixed (at least one fixed cost). For
firms, the quantity of labour might be flexible, whilst the quantity of capital
is fixed. In the long run, the scale of production is flexible - all costs are
variable.
, The marginal return of a factor
The extra output derived per extra unit of the factor employed. For labour, it
is the extra output per unit of labour employed.
The average return of a factor
The output per unit of input. This is output per worker over a period of time.
The total return of a factor
The total output produced by a number of units of factors (e.g. labour) over
a period of time. The amount of capital is fixed.
The law of diminishing returns
Diminishing returns only occur in the short run. The variable factor could be
increased in the short run e.g. employ more labour - over time, becomes
less productive, so the marginal return of the labour falls. Therefore, total
output still rises, but it increases at a slower rate.
However, e.g. outsourcing means that firms can cut costs + be more
flexible.
Returns to scale:
The change in output of a firm after an increase in factor inputs.
Increasing returns to scale
When the output increases by a greater proportion to increases in inputs.
E.g.
if input x2 and output x4.
Decreasing returns to scale
E.g. input x2 and output x1.5. This is linked to diseconomies of scale - firm
becomes less productive.
Constant returns to scale
When output increases by the same amount that input increases by.
Costs of production
In the short run, at least one factor of production cannot change - some
fixed costs.
In the long run, all factor inputs can change - all variable costs.
E.g. production might move to a new factory - not possible in the short run.
The short run for the pharmaceutical industry is longer than for retail.
Fixed costs do not vary with output e.g. rents, advertising and capital goods
- they are indirect.
Variable costs change with output. They are direct costs e.g. raw materials.
Total costs = VC + FC
Average costs = TC / quantity
The marginal cost of production is the cost of producing one extra unit of
output.
Production + productivity
Production
Converts inputs into a final output. This satisfies consumer needs + wants.
Productivity
Output per worker per period of time.
Being more productive means the same input produces more output, over
the same period from e.g. training or machinery which lowers costs per unit.
Specialisation, division of labour and exchange
Specialisation
When each worker completes a specific task in a production process.
Through the division of labour, productivity can increase + lower costs.
Advantages:
● Higher output + quality
● Maybe a greater variety
● Economies of scale
● Lowers costs to keep prices down
Disadvantages:
● Work becomes repetitive
● Untransferable skills
● Higher staff turnover
Countries can specialise + exploit their comparative advantage.
Advantages:
● Greater world output
● Lower costs from more competition
● More choice
● Outward shift in the PPF curve
Disadvantages:
● LICs might use up non-renewable resources too quickly
● Over-dependence on a single export
The law of diminishing returns and returns to scale
In the short run, the scale of production is fixed (at least one fixed cost). For
firms, the quantity of labour might be flexible, whilst the quantity of capital
is fixed. In the long run, the scale of production is flexible - all costs are
variable.
, The marginal return of a factor
The extra output derived per extra unit of the factor employed. For labour, it
is the extra output per unit of labour employed.
The average return of a factor
The output per unit of input. This is output per worker over a period of time.
The total return of a factor
The total output produced by a number of units of factors (e.g. labour) over
a period of time. The amount of capital is fixed.
The law of diminishing returns
Diminishing returns only occur in the short run. The variable factor could be
increased in the short run e.g. employ more labour - over time, becomes
less productive, so the marginal return of the labour falls. Therefore, total
output still rises, but it increases at a slower rate.
However, e.g. outsourcing means that firms can cut costs + be more
flexible.
Returns to scale:
The change in output of a firm after an increase in factor inputs.
Increasing returns to scale
When the output increases by a greater proportion to increases in inputs.
E.g.
if input x2 and output x4.
Decreasing returns to scale
E.g. input x2 and output x1.5. This is linked to diseconomies of scale - firm
becomes less productive.
Constant returns to scale
When output increases by the same amount that input increases by.
Costs of production
In the short run, at least one factor of production cannot change - some
fixed costs.
In the long run, all factor inputs can change - all variable costs.
E.g. production might move to a new factory - not possible in the short run.
The short run for the pharmaceutical industry is longer than for retail.
Fixed costs do not vary with output e.g. rents, advertising and capital goods
- they are indirect.
Variable costs change with output. They are direct costs e.g. raw materials.
Total costs = VC + FC
Average costs = TC / quantity
The marginal cost of production is the cost of producing one extra unit of
output.
