Business Economics

Converting inputs into outputs with an exchangeable value

Output per unit of input employed.

It is a way of measuring how efficiently a company or an economy is producing its output.

The amount of output produced per worker (or per worker-hour)

A type of specialisation where production is split into different tasks and specific people are allocated to each task.

Adam Smith explained the increase in productivity that could be achieved through division of labour.

• People can specialise in what they are best at

• Better quality and higher quanity of products due to increased labour productivity

• Firms can achieve economies of scale

• More efficient production

• Reduced training costs

• Workers can end up doing repetitive tasks, leading to boredom

• Countries can become less self-sufficient

• Lack of flexibility for workers

• A medium of exchange

• A measure of value

• A store of value

• A standard (or method) of deferred payment

Any business organisation which generates revenue by selling their output. They use factors of production to produce the output.

The economic cost of producing the output. This includes the money cost of FoPs as well as opportunity cost.

At least one of a firm’s factors of production is fixed

All factors of production can be varied

All the costs involved in producing a particular level of output

TC = TFC + TVC

Cost per unit produced.

AC = TC / Q

• Likely to be u-shaped

• AC initially falls as output increases and then starts to increase

• AVC is u-shaped because it is limited by FoPs

• AFC falls as output rises because TFC is spread across greater levels of output

The cost advantages of production on a large scale

• Production line methods can be used to make a lot of things at a very low average cost

• Specialised equipment can help reduce average costs

• Workers can specialise - this might not be possible in a small firm

• Law of increased dimensions

• Large firms will need larger supplies of raw materials so can negotiate discounts with suppliers

• They can get a good bargain because they will be the most important customers of suppliers

• Large firms can employ specialist managers to take care of different areas of the business

• They gain expertise and experience in a specific area of the business, leading to better decision-making abilities in that area

Larger firms can often borrow money at a lower rate of interest. Banks also view lending to them as less risky compared with smaller firms.

• Larger firms can diversify into different product areas, leading to a more predictable overall demand

• This makes them more able to take risks, as their other acitivities allow them to absorb the costs of failure more easily

• Advertising is usually a fixed cost which can be spread over more units for larger firms, reducing the cost per unit

• Larger firms also benefit from consumer trust due to brand awareness

• Local colleges may start to offer qualifications needed by big local employers, reducing training costs

• Improvements in road networks and public transport

• Suppliers may choose to locate in the same area, reducing transport costs

Average costs rise as output rises

• Waste and loss can increase. Bigger warehouses might lead to more things getting lost

• Communication and coordination may become more difficult

• As a whole industry becomes bigger, the price of raw materials may increase (since demand will be greater)

• Buying large amounts of materials may not make them less expensive per unit, such as when supplies need to be transported long distances

A firm which is a price taker has no power to control the price it sells it. It will have a flat (perfectly elastic) demand curve).

These firms have some power to set the price they sell at. Its demand curve will slope downwards - to increase sales the firm must reduce the price.