3.3 costs, revenues and profits Flashcards
explanation of total product?
total product rises rapidly initially and then the rate decreases as the marginal product falls
explanation of marginal product?
shows extra production from each worker, fall in marginal products helps to explain diminishing marginal productivity
explanation of marginal cost?
shows extra cost of producing one more item, MC falls when MP rises and MC rises when MP falls
explanation of total variable cost?
diminishing total of all marginal costs, MC is gradient of TVC
explanation of average variable cost?
AVC = TVC/Q
average variable costs is total variable costs divided by output
explanation of total fixed costs?
fixed costs are any costs which do not vary with output
explanation of average fixed cost?
fall as output increases
explanation of total cost?
overall cost of producing at a particular level of output
TC=TVC+TFC
explanation of average cost?
average cost of production per unit
AC= TC/Q
AC= AVC+AFC
what is short run?
period of time where at least one factor input is fixed
where is long run?
period of time where all factor inputs are variable
what is diminishing marginal productivity?
occurs in short run, add increasing amounts of a variable input to fixed inputs marginal output starts to fall, diminishing return to labour occurs when marginal product of labour starts to fall, new workers will not have as much capital equipment to work with, marginal product starts to fall becomes more expensive to produce an additional unit of output
what are economies of scale?
occurs in long run, cost advantages exploited by expanding the scale of production in LR, reduce LR average costs over a range of output
what are internal economies of scale?
increase in the scale of a firm due to internal reasons
what are external economies of scale?
increases in the size of industry or a wider change in the economy which allows firms in the industry to increase their scale
key elements of internal economies of scale?
-expansion of the firm itself
-lowers LR average cost
-efficiencies from larger scales of production
-range of economies
key elements of external economies of scale?
-expansion of the industry
-benefits most/ all firms
-agglomeration economies are increasingly important
-helps to explain the rapid growth of many cities
economies of scale within businesses?
lower costs represent an improvement in productive efficiency and can feed through to consumers in lower prices, economies of scale give a business a competitive advantage in the marketplace, lower prices and higher profit
what’s an example of technical economies of scales?
large scale businesses can afford to invest in expensive and specialist capital machinery
what’s an example of commercial economies of scale?
where firms take advantage of bulk discounts and bargaining power
what’s an example of financial economies of scale?
enable more favourable rates of borrowing for more trustworthy businesses
what’s an example of managerial economies of scale?
occur when large firms can afford specialist, effectively manage particular areas of the company
what’s an example of risk bearing economies of scale?
often derived by large firms who can bear business risks more effectively than others
when do diseconomies of scale occur?
when a business grows so large hat the costs per unit increase, generally occur as a result of the difficulties of managing a larger workforce
what are reasons for diseconomies of scales?
poor communication, lack of motivation,loss of direction and coordination
how is poor communication a reason for diseconomies of scale?
business expands communicating between different departments and along the chain of command becomes more difficult, layers in hierarchy distort message and workers have less clear instructions, less feedback and therefore less effective communication
how is lack of motivation a reason for diseconomies of scale?
workers can often feel more isolated and less appreciated in a larger business, loyalty and motivation diminish, harder for managers to stay in contact with workers, falling productivity levels and increase in average labour costs per unit
how is loss of direction and coordination a reason for diseconomies of scale?
harder to ensure that all workers are working for the same goal, more difficult for managers to supervise their subordinates, manager may be forced to delegate more tasks
what are normal profits?
amount of profits required to keep factors of production in their current use, no incentive to leave or join industry, firms must be earning normal profits
what are supernormal profits?
any profit that is above normal profit, has the effects of attracting new entrants into the market
what are the roles of barriers to entry relating to normal profits?
significant barriers to entry, possible for firms to earn supernormal profits in the long run
what are the roles of barriers to entry relating to supernormal profits?
no barriers to entry, supernormal profits will attract new firms to join the industry
what does shut-down point mean?
when the business flips from being viable to not viable
what conditions in the long run would a firm reach shut-down point?
if there are no longer any fixed costs, so if AR> AC, better off
