Production, Costs and the Labour Market

Making things, and what it costs

To provide goods and services, a firm has to produce them, and producing them costs money. Production is often made more efficient by the division of labour, where workers each concentrate on particular tasks and so get faster and better at them. The money a firm spends splits into costs that stay the same whatever it makes and costs that rise as it makes more. To keep going, a firm must earn more in revenue than it spends, so that it makes a profit. It also has to hire workers in the labour market, where wages are set. This module covers production, costs, profit and the labour market.

Production and cost words

Learn these terms before the costs are described. They are the words every production answer needs.

Match each cost to its meaning

Fixed costs against variable costs

Sorting a cost into fixed or variable is a common exam task. The test is simple: ask whether the cost changes when output changes.

Which is a fixed cost?

Which of these is a fixed cost for a factory?

• The yearly rent on the building
• The raw materials used in each item
• The pay of extra staff hired by the hour
• The electricity used to run the machines

From costs to profit

Profit is what makes a firm worth running, and it follows a simple chain. First add up the revenue, the money coming in from sales. Then add up the total costs, both fixed and variable. Take the costs away from the revenue and what remains is the profit. If the costs are larger than the revenue, the firm makes a loss instead. A firm can raise its profit by selling more, by charging more, or by cutting its costs, but each of those has knock-on effects. Revenue, then costs, then subtract: that order keeps a profit calculation clear.

Pick the variable costs

Select every cost that is a variable cost for a firm.

• The raw materials used in production
• The wages of staff paid by the hour
• The electricity used to run the machines
• The yearly rent on the building
• The fixed insurance charge

Order how to find profit

Put the steps for working out a firm profit in the correct order.

• Add up the total revenue from sales
• Add up the total costs, fixed and variable
• Take the total costs away from the revenue
• Read the result as the profit
• Check whether it is a profit or a loss

Complete the production facts

A cost that does not change with output is a _____ cost. A cost that rises as output rises is a _____ cost. The output produced per worker is called _____. Profit is revenue minus total _____.

A bakery counts its costs

Picture a small bakery. Whether it bakes one loaf or a thousand, it still pays the same rent on its shop, so the rent is a fixed cost. The flour, on the other hand, costs more the more loaves it bakes, so flour is a variable cost. Adding the fixed and variable costs together gives the total cost. Now suppose the total cost for a day is 200 pounds and the bakery makes 20 loaves. Dividing the total cost by the number of loaves gives an average cost of 10 pounds a loaf. If the bakery sells each loaf for more than that average cost, it makes a profit; if for less, it makes a loss. Sorting the costs and then averaging them is the heart of this topic.

Tap what raises a wage

Tap the TWO things that tend to make a job pay a higher wage.

• The work needs rare, hard-to-find skills
• The work is dangerous or unpleasant
• Almost anyone can do the work with no training
• The work is very easy and always in plentiful supply

Work out the average cost

A firm has a total cost of 200 pounds to make 20 units. What is the average cost per unit, in pounds? Divide the total cost by the number of units.

Read each cost situation

Read each situation and choose the best answer.

• A factory pays the same rent whether it makes 10 items or 1000 items. What kind of cost is the rent?
• A job needs rare, highly skilled workers who are hard to find. What is likely to happen to the wage?
• A firm earns 500 pounds in revenue and has total costs of 300 pounds. What is its profit?

Build a labour-market point

Choose the word for each gap to complete one clear point about how wages are set.

Explain production, costs and wages

A friend thinks a business just needs to sell things to make money, and that all costs are the same. Using what you have learned, explain production, costs and how wages are set.

• Explain what the division of labour is and why it helps
• Explain the difference between fixed and variable costs
• Explain how a firm works out its profit
• Explain how wages are set in the labour market
• Explain why some jobs pay more than others