Production, Costs and Revenue

Production converts inputs (raw materials, labour) into outputs (things to sell for profit). Inputs can be any of the factors of production, they can be tangiable (raw materials) or intangiable (ideas, talents and knowledge). The outputs produced should have exchange value, they need to be something that can be sold 

The factor inputs are: land, labour, enterprise and capital

Capital goods: are goods used to make consumer goods and services, include fixed plants and machinery, hardware, software and buildings

Consumer goods: directly satisfy our needs and wants, split into consumer non-durables, consumer durables and consumer services 

Production is a measure of the value of the output of goods and services, measured by GDP or an index of production

LProductivity is a measure of efficeiency of the factors of production. It is measured by output per person or by output per person per hour. 

An increase in production doesn't necessarily mean an increase in productivity - it depends on how many factor inputs have been employed to supply the extra output 

factor inptuts + factor productivity = output of goods and services

Short run: at least one factor of production is fixed

Long run: all factors of production are variable 

In the long run, productivity is a major determinant of economic growth and inflation

A fall in labour productivity leads to a rise in a firm's costs of production. Higher productivity allows higher wages to be paid while a firm can also benefit from higher profits 

Factors affecting labour productivity :

• degree of competition in the market/industry 
• advances in production technology
• specialisation (division of labour)
• higher business investment in new capital input
• quality of management 
• high quality national infrastructure (eg transport)
• level of demand for a product - using spare capacity

Specialisation is the process of focusing on one particular task in production. It can happen at different levels of society. Can be in a country (eg Ghana is the world's biggest supplier of cocoa) or within a paticular region. It can also occur in labour, where workers are assigned specific within the production system. 

By specialisation on a regional scale, countries can benefit from economies of scale, which lowers the cost of production 

Division of labour is specialisation on a micro level is division of labour. It was a term coined by Adam Smith. He states that by allowing workers to perform specialised tasks, output per worker can be increased as they become proficient at the task. Each worker becomes responsible for a certain task and 'learning by doing' 

Medium of Exchange

A medium of exhange is essential for specialisation/ division of labour to take place. Without exchange people would be creating a surplus of a particular good with no use for it. Traditionally, exchange would need the coincidence of two needs/wants. Money is now the medium of exchange in most situations. Trade and inter-country relationships are needed in order for specialisation to occur, as if one country is specilised in producing one good, they need to trade with other countries in order to generate GDP and provide the country with goods and services 

Money is a measure of value, a store of value or a method of deferred payment

Fixed costs: costs of production in the short run, does not change with output (eg rent, salaries of employees). They can include insurance, software/technology or rent/land ownership

Variable costs: costs that change as output changes. These include comission bonuses, wage costs, component parts and basic raw materials  

Total costs = fixed costs + variable costs

Average total costs = total costs / output    (cost per unit produced)

Mraginal costs is the change in total costs from a business producing one extra unit of a good or service

  As units increase, costs decrease (economies of scale) until all factors are used to their productive potential, at the minimum cost point (X,P). The costs then increase due to diseconomies of scale 

 The fixed costs will remain the same, but as number of units increases, the average fixed costs per unit will decrease. The fixed costs remain the same but they are spead across many more units. 

Internal economies of scale:

• expansion of the firm itself 
• lower long run average costs
• efficiencies from larger scale production 
• range of economies eg technical and financial 

External economies of scale:

• expansion of the industry
• benefits most/all firms
• agglomeration economies are important 
• helps to explain the rapid growth of many cities 

Internal in the long run:

• techincal economies ie benefits of containerisation 
• purchasing economies eg bulk buying purchases 
• managerial economies - specialised staff
• financial economies eg lower interest rates on loans 
• risk bearing economies from diversification 
• network building - improving relationships with suppliers and customers

Agglomeration: businesses in similar industries cluster together and attract an influx of skilled talent which provides human capital to expanding businesses 

External in the long run:

• reduce unit costs 
• more competitive overseas 
• increase in producer surplus
• higher profits which can be reinvested 

Diseconomies of scale lead to a rise in a firm's long run average cost of production. They result from a business expanding beyond an optimum size and losing productive efficiency. This maye be due to:

• control problems in monitoring productivity and work quality, increasing wastage of resources 
• co-operation, workers in large firms may develop a sense of alienation and loss of morale 
• negative effects of internal policies, information overload, unrealistic expectations among managers and cultural changes between senior people with inflated egos

Diseconomies are costs of production rising as output increases (opposite of economies of scale)

Revenue is all the money earned by a firm from selling its total output. (price x units sold)

Total revenue is all monies recieved by a firm from selling its total output

Average revenue is total revenue divided by output; in a single product firm, average revenue equals the price of the product (AR=TR/Q)

Profit     is total revenue - total costs (TR>TC then gain)

 AR curve = demand curve