2.1 Developing short-run production theory: the law of diminishing returns Flashcards
What is labour productivity?
Quantity of units produced by a worker in a given period of time
What is specialisation?
When a country or firm only focuses on a limited quantity of goods but produces them to a high level of quality
What is division of labour?
Breaking up production so each worker only completes a small quantity of tasks
How do we distinguish between short and long run?
In the short run, at least one factor of production is fixed.
In the long run, all factors of production are variable.
What are sunk costs?
These are costs that the firm has already paid and are not recoverable if the firm wishes to leave the industry
They are unavoidable
What are prospective costs?
These are costs that the firm will take into account when making an investment decision and are avoidable as they are based on the future
What is marginal product?
The change in output when adding a variable FoP
What are marginal returns of labour?
The change in the quantity of total output resulting from the employment of one more worker, holding all variables constant.
What is the law of diminishing returns?
A short term law which states that as a variable factor of production is added to a fixed factor of production, eventually both marginal and average returns will fall
How do you calculate total (physical) product?
Average (physical) product x units of variable input
How do you calculate average (physical) product?
Total output / Units of variable input
Why is there an inverse relationship between marginal returns and marginal costs?
Increasing marginal returns leads to decreasing marginal costs
Decreasing marginal returns leads to increasing marginal costs
How do you calculate marginal costs?
Change in TC / change in output
When are firms at profit maximisation?
When P = MC
