4. Production, Costs & Revenue (AQA A Level Economics): Flashcards

Factors of production are the inputs, such as capital and labour, that are combined to produce goods and services.

The division of labour is when a production task is broken up into several separate component tasks.

Specialisation can occur at the individual, business, regional and global levels.

False.

The division of labour breaks a task into components, while specialisation is a worker concentrating on one of those components.

Specialisation is when a worker, firm, region or country concentrates on producing a particular good, service or task.

Adam Smith developed his ideas of specialisation after observing a pin factory.

Money acts as a medium of exchange, a measure of value, a store of value and a method of deferred payment.

Barter is the direct exchange of one good or service for another without using money.

True.

Money holds its value over time, which means it can be saved and remains valuable in exchange.

Bartering is difficult because it requires a double coincidence of wants.

The division of labour raises output per worker, increasing productivity as workers gain skill in their task.

A medium of exchange is anything widely accepted as payment for goods and services, removing the need for barter.

The short run is the period of time in which at least one factor of production is fixed.

The long run is the period of time in which all factors of production are variable.

False.

It is a short-run concept, as it relies on at least one factor of production being fixed.

The law of diminishing marginal returns states that as more of a variable factor is added to fixed factors, the additional output from each extra unit eventually falls.

In the short run, diminishing marginal returns occur as a variable factor is added to a fixed factor.

In the long run, all factors of production are variable.

Returns to scale describe the relationship between a proportional change in all inputs and the resulting change in output in the long run.

True.

When all inputs rise by a given proportion and output rises by more, the firm enjoys increasing returns to scale.

Constant returns to scale occur when output rises by the same proportion as the inputs.

Increasing, constant and decreasing returns to scale.

Marginal returns are the additional output gained from adding one more unit of a variable input, holding all other inputs constant.

Diminishing marginal returns are a short-run idea where only the variable factor changes, whereas returns to scale are a long-run idea where all factors change.

Fixed costs are costs that do not change as the level of output changes.

Variable costs are costs that vary directly with the level of output.

False.

Fixed costs, such as rent, must be paid whether output is zero or very high.

Total cost is the sum of total fixed costs and total variable costs.

Total variable cost equals variable cost per unit multiplied by quantity.

Average total cost is total cost divided by quantity (AC = TC / Q).

Average fixed cost is total fixed costs divided by the quantity of output (AFC = TFC / Q).

True.

Spreading the same fixed costs over more units means average fixed cost declines as output rises.

In the short run at least one input, such as capital, is fixed.

In the long run all costs become variable, as every input can be adjusted.

Average variable cost is total variable costs divided by the quantity of output (AVC = TVC / Q).

Examples of fixed costs include building rent, management salaries and insurance.

Marginal cost is the additional cost of producing one more unit of output.

As marginal returns increase, marginal cost decreases, reflecting an inverse relationship between them.

True.

While marginal cost lies below the average it pulls it down, and above the average it pulls it up, so it cuts each at its minimum.

Capital-intensive production uses a high proportion of capital, such as machinery, relative to labour.

The vertical distance between the AVC and AC curves is equal to the average fixed cost.

Diminishing returns begin when marginal cost starts to increase.

Labour-intensive production uses a high proportion of labour relative to capital.

True.

An increase in factor prices raises the cost of the inputs used, increasing the firm's costs of production.

When marginal cost is below average cost, it pulls the average down.

Higher productivity lowers cost per unit, as more output is produced from the same level of inputs.

AVC converges towards AC because average fixed cost falls continuously as output increases.

Economies of scale are the efficiencies gained as a firm increases its scale of output, lowering its average costs of production.

Internal economies of scale occur as a result of the growth in the scale of production within the firm itself.

False.

External economies of scale arise from growth in the size of the whole industry, generating lower average costs from factors outside the firm.

Large firms are perceived as less risky, so a cheaper loan gives them a financial economy of scale that lowers their average costs.

A purchasing economy of scale occurs when large firms buy raw materials in greater volumes and receive a bulk purchase discount.

External economies of scale occur when an increase in the size of the industry lowers the average costs of firms within it.

Diseconomies of scale are the factors that cause a firm's average costs to rise as it increases its scale of output beyond a certain point.

Its average costs rise as output increases, reflecting decreasing returns to scale in the long run.

True.

This is a communication diseconomy of scale, where slow, inefficient communication increases average costs.

The minimum efficient scale is the lowest cost point on a firm's long-run average total cost curve, the lowest possible cost per unit achievable in the industry.

It experiences constant returns to scale, where average costs are neither falling nor rising.

A geographic cluster, such as car manufacturers in Sunderland, is a source of external economies of scale.

The long-run average cost curve is the line of best fit between the lowest points of the short-run average total cost curves as a firm expands its scale of production.

A firm can plan to increase its scale of production in the long-run, for example by increasing the size of its factory.

True.

The LRAC is generated by joining the lowest points of successive short-run average total cost curves as the firm expands.

Day-to-day operations of a firm occur in the short-run.

Its average unit costs fall, as a larger scale generates more output on a more efficient SRAC curve.

The L-shaped long-run average cost curve is a variation of the LRAC where diseconomies of scale do not turn the curve upwards, so it stays relatively flat.

False.

The L-shaped curve suggests that in some industries diseconomies of scale do not cause the LRAC to turn upwards, so it stays relatively flat.

After reaching its minimum efficient scale, it continues operating at its lowest possible cost level without experiencing diseconomies of scale.

On an L-shaped curve, average costs stay relatively flat rather than turning upwards.

It is generated by the addition of successive short-run average cost curves as the firm expands its scale of production.

The short-run average cost curve shows a firm's average unit costs at a fixed scale of production, before it can expand capacity in the long-run.

Total revenue is the total value of all sales a firm receives, calculated as selling price multiplied by quantity sold.

Average revenue is the overall revenue per unit, calculated as total revenue divided by quantity sold.

Marginal revenue is the extra revenue received from the sale of an additional unit of output.

Total revenue = selling price (P) × quantity sold (Q).

Average revenue is calculated as total revenue divided by quantity.

True.

In perfect competition the firm is a price taker, so MR = AR = Demand and total revenue rises at a constant rate.

It must lower its price, so both average revenue and marginal revenue fall with each additional unit sold.

True.

The marginal revenue curve is twice as steep as the average revenue curve in imperfect competition.

Total revenue is maximised when marginal revenue equals zero; beyond this point total revenue begins to fall.

In perfect competition, the firm is a price taker and sells every unit at the same price.

Average revenue represents the firm's demand curve.

Normal profit occurs when total revenue equals total costs, also known as breakeven.

True.

Normal profit is the breakeven point, where total revenue equals total costs including implicit costs.

Supernormal profit, also called abnormal profit, occurs when total revenue is greater than total costs.

Profit = total revenue (TR) − total costs (TC), where total costs include both explicit and implicit costs.

A firm makes a loss when total revenue is less than total costs.

Explicit costs are the costs which have to be paid, such as raw materials and wages.

False.

A loss occurs when total revenue is less than total costs; supernormal profit occurs when revenue exceeds costs.

Implicit costs are the opportunity costs of production, the cost of the next best alternative use of the firm's resources.

Yes, economists include both explicit and implicit costs in total costs.

True.

Normal profit is where total revenue equals total costs, so average revenue equals average cost.

Profit acts as a reward and incentive for entrepreneurship and innovation.

Profit signals that firms are meeting consumer demands efficiently, encouraging resources to be reallocated towards the goods consumers value most.

Invention refers to the creation of entirely new products and processes that did not exist before.

Innovation refers to the development of existing products, designs or ideas to improve them or introduce new features.

True.

Improving an existing product with new features is innovation, whereas inventing the printing press itself was invention.

Invention creates entirely new products or processes, while innovation develops or improves existing ones.

Automated processes reduce waste and allocate resources in the most optimal way.

Creative destruction is the process, linked to technological change, whereby innovative products and industries emerge and replace declining traditional ones.

It improves methods of production, productivity and efficiency, helping firms benefit from economies of scale and lower unit costs.

False.

Technology can reduce barriers to entry, allowing small firms to enter markets dominated by larger firms, for example via Etsy.

Web technologies can reduce information asymmetry by making pricing and product information more available.

A jewellery maker can set up shop on Etsy and showcase their designs to a large market they could not otherwise reach.

True.

New industries such as streaming replacing older ones like Blockbuster is creative destruction driven by technological change.

It can lead to more oligopolies or monopolies, as giants like Google and Amazon dominate through brand loyalty and economies of scale.