Production, costs, revenue and profit
What's covered
Key facts
Economies of scale
In a larger firm more layers of hierarchy can distort messages, and fewer face-to-face meetings reduce feedback.
Production and productivity
Productivity is the main determinant of living standards.
The importance of cost, revenue and profit for producers
Average cost (cost per unit) = total cost / quantity of output.
Economies of scale
Workers in large firms may feel isolated and less appreciated; the main result of poor motivation is falling productivity and higher average labour costs per unit.
Production and productivity
Productivity growth and lower unit costs are key determinants of the competitiveness of British firms.
The importance of cost, revenue and profit for producers
Average revenue is total revenue divided by quantity sold, which equals the price per unit.
Economies of scale
Diseconomies of scale occur when a business grows so large that its costs per unit increase.
Production and productivity
Businesses can afford higher wages when their workers are more efficient.
The importance of cost, revenue and profit for producers
Business objectives include profit, sales growth and increasing market share.
Economies of scale
Economies of scale are the cost advantages a business gains by expanding its scale of production; their effect is to reduce average (unit) costs of production.
Practice questions with answers
A taste of the 31 questions in this topic, answers marked. Sign up to practise the full set with spaced repetition.
What happens to a firm's average cost when it benefits from economies of scale?
- •It falls as output falls
- ✓It falls as output rises
- •It rises as output rises
- •It stays fixed as output rises
Which of these measures productivity rather than production?
- •Number of workers employed
- ✓Output per worker per hour
- •Total units made in a year
- •Total value of goods sold
Which of these is a fixed cost for a bakery?
- •Eggs bought for each batch
- •Flour used in each loaf
- ✓Monthly rent on the shop
- •Paper bags for each sale
A large firm hires specialist finance and marketing managers. Which economy of scale is this?
- ✓Managerial
- •Purchasing
- •Risk-bearing
- •Technical
Which of these is most likely to raise labour productivity?
- •Cutting the staff training budget
- •Hiring more workers to do the same job
- ✓Training workers in new skills
- •Using older, cheaper machinery
A firm cuts its prices to win customers from rivals. Which business objective is it most likely pursuing?
- •Cutting total output
- ✓Increasing market share
- •Raising average revenue
- •Reducing fixed costs
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