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Section 3 - Business Economics- Specialization and costs - Coggle Diagram
Section 3 - Business Economics- Specialization and costs
Production
Converting inputs into outputs
Tangible - things you can touch (raw materials)
Intangible - things that can't be touched (ideas)
Productivity
Way of measuring how efficiently a company or an economy is producing its output
Labour productivity
Improvements are a result of better training/ more experience
Specialization can also improve labour productivity
Being more productive lowers average costs per unit output
Output per worker/ output per hour worked
Output per factor employed
Specialisation
Division of labour - production is split into different task and specific people are allocated to each task
Advantages
This can lead to a better quality and higher quantity of products for the same amount of effort
More efficient production, resources are used more efficiently
Training costs are reduced if workers are only trained to perform certain limited tasks
Disadvantages
Workers can end up doing repetitive tasks, which can lead to boredom
Countries can become less self-sufficient, if trade is disrupted there could be problems
Can lead to a lack of flexibility, workers and firms struggle to adapt to changes in the market
Trade
Specialization means trade becomes vital
Swapping goods with other countries is a way a country can get what it needs - called a barter system
Advantages
Greater world output, gain in economic welfare
Increased supply of goods to choose from
Outward shift in PPF curve
Disadvantages
Less developed countries might use their resources too quickly
Countries might become over dependent on export of a good
Focusing on a narrower range of activities
Adam Smith reasons
Worker won't need to switch between tasks, saves time
More and better machinery or capital can be employed, capital widening
Practice makes perfect, workers become more efficient overtime
Function of money
Medium of exchange - Without money, exchange could only take place if there was a double coincidence of wants
Measure of value - Provides way to measure the relative values of goods
Store of value - Money can be kept for a long time without expiring
Method of deferred payment - People can pay for things without having the money present, and pay for it later
Costs of a firm
Revenue
Profit is total revenue minus total cost
Fixed/ Variable
Short run
Period where atleast one of a firm's FOPs is fixed
Fixed
Don't vary with output
Have to be paid whether not anything is produced
Rent is fixed
Variable
Do vary with output
Cost of plastic bags - higher sales lead to higher overall cost
Long run
period when all FOPs can be varied
All costs are variable
Total cost (TC)
Total cost = Total fixed cost + Total variable cost
TC = TFC + TVC
Average cost (AC or ATC)
Cost per unit produced
AC = TC/Q (Total cost/ quantity produced)
AFC = TFC/Q (total fixed cost/ quantity produced)
AVC = TVC/Q (total variable cost/ quantity produced)
Marginal cost (MC)
Extra cost of producing one more unit of output
Only affected by variable costs
MC = change in total cost/ change in quantity
Short run average cost curve
u-shaped
Tends to initially fall as output increases, until it reaches a minimum and then it starts to increase due to diminishing returns
AVC falls initially with output as productivity tends to rise, but eventually it is limited by fixed FOP, and starts to rise again
AFC falls as output rises, so AFC slopes downards, as output increases, fixed cost is spread across a greater output level