What is meant by the term derived demand?
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What is meant by the term derived demand?
Derived demand is the demand for a factor of production that arises from the demand for the final product it is used to produce.
Define the term opportunity cost.
Opportunity cost is the value of the next best alternative that is given up when a choice is made.
State the meaning of factor substitution.
Factor substitution is the process of replacing one factor of production with another, eg. replacing labour with capital
What does factor productivity mean?
Factor productivity refers to the efficiency with which a factor of production is used to produce output.
Define elasticity of demand.
Elasticity of demand measures the responsiveness of the quantity demanded to a change in price.
True or False?
Firms monitor the prices of alternative factors of production to ensure they are maximising profits.
True.
Firms monitor the prices of alternative factors of production to ensure they are maximising profits.
True or False?
The availability of the factors of production is constant.
False.
The availability of factors of production can change rapidly, as seen during the COVID-19 pandemic.
State the formula used to calculate total revenue.
Formula.
Total revenue = Price × Quantity sold
What is the definition of total cost?
Total cost is the sum of all costs incurred by a firm in the production of a good or service.
How can firms increase profits?
Firms can increase profits by raising selling prices or decreasing the cost of factors of production.
What is labour-intensive production?
Labour-intensive production is production in which the proportion of labour costs is higher than the costs of other factors of production.
Define capital-intensive production.
Capital-intensive production is production in which the proportion of machinery costs is higher than the costs of other factors of production.
How do firms choose between labour- and capital-intensive production?
Firms consider the nature of their product and the advantages and disadvantages of each method and choose the most suitable option e.g. a furniture maker that specialises in handmade furniture will employ labour and not capital.
State the advantages of labour-intensive production.
Advantages of labour-intensive production include:
Flexibility in adjusting the workforce size
The potential for customer connections
Worker innovations which reduce costs
What are the disadvantages of labour-intensive production?
Disadvantages of labour-intensive production include:
The potential for low productivity
Difficulty recruiting and retaining workers
High wage and benefit costs
Worker absenteeism
How does capital-intensive production address worker absenteeism?
With capital-intensive production, the work is done by machines, and absenteeism or a shortage of skilled workers is less of an issue.
What is the definition of marginal cost?
The marginal cost is the additional cost incurred by producing one more unit of output.
Define the term depreciation.
Depreciation is the decrease in value of an asset over time due to wear and tear or obsolescence.
How does capital-intensive production affect the firms' ability to respond to changing tastes?
With capital-intensive production, it can be difficult for a firm to respond to changing customer tastes or fashions that require product changes. Changing machinery is an expensive process.
True or False?
Firms often finance new machinery using a bank loan.
True.
Firms often finance new machinery using a bank loan.
What is production?
Production is the act of adding value to factors of production to create goods or services.
Define the term productivity.
Productivity is a measure of efficiency that calculates the amount of output produced per unit of input.
How is production measured?
Production is measured as output, e.g. 3 cans of soup.
How is productivity measured?
Productivity is a measure of efficiency, e.g. 3 cans produced per worker.
What influences production levels?
Production is influenced by:
The state of the economy
The demand for goods or services
The ready supply of the factors of production
Define the term recession.
A recession is a period of six months of economic decline characterised by falling output and employment levels.
How does productivity impact the competitiveness of a firm ?
Higher productivity lowers costs and improves a firm's ability to compete nationally and internationally. With lower costs, the firm can offer lower prices.
True or False?
Higher productivity allows firms to produce more with the same input.
True.
Higher productivity allows firms to produce more output with the same input.
State the formula used to calculate labour productivity.
Formula.
Labour productivity = Total output ÷ Total labour input
What is the definition of innovation?
Innovation is the introduction of a new or improved product, process, or idea.
Define entrepreneurial freedom.
Entrepreneurial freedom refers to the ease with which individuals can start and operate businesses in an economy.
How does competition influence productivity growth?
Competition between rival firms ensures that productivity improvements continue to occur as firms seek to gain market share.