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Economics > 1.5 PRODUCTION AND COSTS > Flashcards

1.5 PRODUCTION AND COSTS Flashcards

1
Q

PRIMARY AIM OF FIRMS

A

profit maximisation

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2
Q

TC

A

FC + VC

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3
Q

ATC x2

A

TC / Q

AFC + AVC

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4
Q

AFC

A

FC/Q

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5
Q

AVC

A

VC/Q

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6
Q

MC x2

A

change in TC/
change in Q

the slop of TC

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7
Q

SHORT RUN PRODUCTION

A

period of time during which
the number of firms in an industry

and the amount of land and capital

employed by existing firms are fixed in quantity

only variable costs like labour can vary

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8
Q

LONG RUN PRODUCTION

A

period of time during which

amount of land and capital

used in production by existing firms are variable

> D= increase capital from firms and new firms enter

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9
Q

LAW OF DIMINISHING RETURN

A

shows as more and more of a variable resource- labour

is added to a fixed resource-capital

beyond a certain point the productivity of additional units of the variable resources declines

because the amount of capital is fixed

more workers find it harder to continually add to the firm’s output

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10
Q

LAW OF DIMINISHING RETURNS EXPLAINS…

A

the shape of a firms SR productivity cruves

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11
Q

LAW OF DIMINISHING AND MARGINAL PRODUCT

A

as successive units of the variable factor are added

the marginal output will at first increase then decrease

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12
Q

MC

A

the cost of producing one extra unit of output

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13
Q

EXPLICIT COSTS

A

monetary payments (wages) to factors of production not already owned by a firm

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14
Q

IMPLICIT COSTS

A

“normal profit”

opportunity cost faced by a business owner

who chooses to use his skills and resources

to operate his own enterprise

rather than seeking employment by someone else

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15
Q

COST IN THE LONG RUN OVERVIEW

A

in the long run all FoPs are variable

a firm can change its size/scale

3 things can happen:

increasing returns

constant returns

decreasing returns

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16
Q

INCREASING RETURNS

A

an increase in inputs leads to a larger proportional increase in output

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17
Q

CONSTANT RETURNS

A

when an increase in inputs leads to a proportionally identical increase in output

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18
Q

DECREASING RETURNS

A

when an increase in inputs leads to a proportionally smaller increase in the quantity of output

“too big for its own good”

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19
Q

ECONOMIC COSTS

A

opportunity costs of all resources employed by the firm

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20
Q

ECONOMIES OF SCALE CATEGORIES x6

A

risk bearing

financial

marketing

technical

managerial

purchasing

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21
Q

DISECONOMIES OF SCALE x3

CCCM

A

Communication

Co-ordination

Control

Motivation

22
Q

ECONOMIES OF SCALE CATEGORIES

A

really fun mums try making pies

internal- only firm benefits

external- whole industry benefits
e.g airport attracts lots of business as businesses cluster they are more powerful

23
Q

MES

A

minimum efficient scale

minimum level of output for EOS to be fully exploited

24
Q

LAW OF DIMINISHING RETURNS CAN EXPLAIN

A

MC and MP as they are mirrors of each other

AP and ATC as they are mirrors of each other

TVC

25
Q

LAW OF DIMINISHING RETURNS OVERVIEW

A 
productivity gains
specialization
unused capital
increase productivity
as output increase quicker than costs

diminishing returns
fixed capital= constraint
decrease productivity
costs increase to increase output

26
Q

TR

27
Q

AR

28
Q

MR

A

change in TR/

change in Q

29
Q

EVALUATION OF EOS/DISEOS

A

depends on initial level of output
if firm is to the left of MES then if it increases output it will not experienced disEOS

depends on the initial fixed costs of the firm

if the firm has massive fixed costs then it will take a greater time/ quantity for MES to be reached

MES can be prolonged over a period of time

30
Q

OBJECTIVES OF FIRMS

A
  1. profit maximise
  2. satisficing
    - -> SURVIVAL
  3. revenue maximise
  4. sales maximise
31
Q

PROFIT MAXIMISE

A

MR = MC

LR

32
Q

SATISFICING

A

sacrifice + satisfying

SR

different stakeholders have different objectives = conflict

33
Q

REVENUE MAXIMISE

A

MR = O

drive out competition with predatory prices

increase size

lead to EOS- barrier to entry

34
Q

SALES MAXIMISE

A

AR=AC
break even

increase size

lead to EOS- barrier to entry

35
Q

BARRIERS TO ENTRY

MAIN 3 CATEGORIES

A

legal- patents/ reg/ H&S

structural- high start up costs

strategic- anti competitive prices

36
Q

BARRIERS TO ENTRY

A

EOS

legal

v. high start up costs

anti competitive prices

branding/advertising

sunk costs

37
Q

BARRIERS TO EXIT

A

resale of asset

redundancy costs

cost for ending license agreement: rent

= barriers to entry

38
Q

PRODUCTIVE EFFICIENCY

A

P= ATC
maximising output at the lowest possible cost
full exploitation of EOS

39
Q

ALLOCATIVE EFFICIENCY

A

D=S
P=MC
AR=MC

40
Q

DYNAMIC EFFICIENCY

A

re-invest supernormal profits in the LR into R + D and new technology to lower LRAC

41
Q

X EFFICIENCY

A

no waste

all production on AC/ATC curve

42
Q

ALLOCATIVE EFFICIENCY

CONSUMER ANALYSIS

A

resources follow consumer’s demand

low P

max of consumer surplus

high choice

high quality

43
Q

ALLOCATIVE EFFICIENCY

PRODUCER ANALYSIS

A

retain or increase market share

stay ahead of rivals

increase profit

44
Q

PRODUCTIVE EFFICIENCY

CONSUMER ANALYSIS

A

lower price

high C surplus

full exploitation of EOS

MC=ATC

45
Q

PRODUCTIVE EFFICIENCY

PRODUCER ANALYSIS

A

move production at lower ATC

higher profit

lower prices = greater market share

46
Q

DYNAMIC EFFICIENCY

CONSUMER ANALYSIS

A

new innovative products

lower P over time

high consumer products

iphone/ internet

creative destruction

47
Q

DYNAMIC EFFICIENCY

PRODUCER ANALYSIS

A

LR profit max

lowest cost over time

retain/ increase market share

stay ahead of rivals

48
Q

X EFFICIENCY

CONSUMER ANALYSIS

A

lower price

higher consumer surplus

49
Q

X EFFICIENCY

PRODUCER ANALYSIS

A

lower costs

higher profits

lower price= increase market shares

50
Q

TECHNOLOGICAL CHANGE CAN LEAD TO

A

more capital or labour intense production

  1. productive E
  2. allocative E
    - -> depends if consumers benefit
  3. dynamic E

shift LRAC down and shift MES to the right on the lower LRAC curve

51
Q

TECHNOLOGICAL CHANGE AND MARKET STRUCTURES

A

n of firms can both increase and decrease depending

product homogeneity: products are more differentiated

knowledge: increased for both consumers and producers

barriers to entry: increase EOS but decrease physical costs

Economics (12 decks)

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