3.3.1, 3.3.2, 3.3.3, 3.3.4 Flashcards
define short run
the short run is the time period when at least one factor of production is fixed
define long run
the time period when all factors of production become variable
define total product
the total output of a firm at a particular level of resource employment
define average product
the output per unit of variable input
how do u calculate average product
labour
define marginal product
the additional output from one extra unit of input
how do you calculate marginal product
change in variable input
draw an average and marginal product curve
y axis is output per unit of input
x axis is input
average product - line going up slightly and then decreasing
marginal product - line going up steeper then decreasing steeper, goes negative
what is the law of diminishing returns
as you add more of a variable factor of production to a fixed factor of production, at first the marginal product increases but eventually starts to fall. diminishing marginal returns is said to take place when marginal product starts to fall.
explain the shape of the marginal product curve with reference to the law of diminishing returns
marginal product rises at first, but then falls as consecutive units of a variable factor add less to total product. as the MP falls this brings down the average product. diminishing marginal returns takes place when the MP falls, and the diminishing average returns takes place when the AP falls
label on the curves diminishing returns and diminishing average returns
DR is the peak of the MP curve
DAR is the peak of the AP curve
define constant returns to scale
where the amount of resources doubles, output also doubles
define increasing returns to scale
when the amount of resources doubles, the output more than doubles
define decreasing returns to scale
when the amount of resources doubles, output less than doubles
how do productivity and factor prices affect firms’ costs of production and the choice of factor inputs?
as productivity increases then a firms average cost of production falls as each factor input is contributing more to total output. investing in capital increase the productivity of labour, depending on the ratio of capital to labour employed. factor prices such as wages, or capital prices affect the cost of production - the higher the factor prices, the higher the costs of production. if one factor price rises in relation to another it might change the choice of factor inputs away from this factor e.g if wages rise, then firms may prefer to employ more capital and less labour.
define fixed costs
costs that do not change with output such as rent
define variable costs
costs that do change with output such as wages
draw a diagram showing the general shape of a total cost, total fixed cost and total variable cost curve
check notes
write a formula showing how you could calculate total costs
total costs = total fixed costs + total variable costs
calculate average total cost
ATC = total cost / quantity
calculate marginal costs
change in total costs / change in output
draw a diagram showing the general shape of an average total cost and marginal cost curve
see notes
draw a diagram showing marginal and average product and underneath a diagram showing marginal and average cost
see notes
how does the law of diminishing marginal returns affect the shape of the marginal and average costs curves
when diminishing returns sets in, MC starts to rise, and when AP starts to fall, ATC starts to rise. these curves are a mirror image of one another.
draw a long run average total cost curve
Costs y axis
q of output x axis
U shaped curve with flat bit in middle
label EOS, DEOS and constant returns to scale (Middle)
define economies of scale
economies of scale are when the long run average total cost falls as output increases
what is meant by internal economies of scale
when long run average total costs fall as the output of the firm increases
what is meant by external economies of scale
when long run average total costs fall as output of the industry increases
what is meant by the minimum efficient scale
the lowest output at which long run average costs are minimised
what are the implications of the minimum efficient scale for the size of a business
if the MES is achieved at a high level of output, this suggests that the industry might prefer larger firms. if the MES is achieved at low levels of output, then there is less scope for economies of scale so this industry favours smaller firms
what are the implications of the MES for the size of barriers to entry
if the MES is achieved at high levels of output, then there is scope for large economies of scale, so barriers to entry will be high as new firms would have to enter the market at a high level of output in order to compelte on price with the incumbent firms
name and briefly describe 6 different types of internal economies of scale
- Purchasing/commercial/bulk buying EOS - lower cost per unit to purchase raw materials when buying in bulk
- technical EOS - the fixed cost of machinery can be spread over a larger output when producing on a larger scale
- managerial EOS - when specialist managers can be more efficient than workers with more general skills. They can only be possible when producing large volumes.
- Marketing EOS - when the fixed costs of marketing can be spread over a larger output, and where bulk buying can take place on marketing space such as billboards
- Financial EOS - when larger firms are lower risk to lend to, and hence attract a lower interest rate on loans
- risk bearing EOS - when the cost of one part of the business falling can be spread over a larger output.
what economies of scale might exist in the car industry
manufacturing uses machinery - technical EOS
Raw materials uses bulk buying
Labour - managerial EOS
briefly describe 3 diseconomies of scale
- communication issues arise as a firm gets too large meaning messages can become distorted as they pass through layers of management and different languages
- co-ordination issues arise as a firm gets too large meaning the logistics of getting the right components in the right places at the right time start to become complicated and more difficult especially if a firm is a MNC
- motivation issues arise if a firm gets too large meaning that individuals feel they are only a small part of the large organisation and so are demotivated to work to their fullest potential.
briefly describe 3 economies of scale
- EO infrastructure means that the larger the industry the more cost effective it is to build things like airports or railways and so it lowers the AC of produxction for firms in this industry
- research and education infrastructure means that the larger the industry the more courses that will be set up to train workers for that industry, making workers more productive. this will lower the AC of production due to higher productivity.
- bigger industries means more available staff with expertise which means higher productivity which lowers AC of production
what general shape would a total revenue curve be
Upward sloping curve (supply curve)
what shape would an average and marginal revenue curve be?
straight horizontal line
define total revenue
total receipts from selling goods and services
define average revenue
revenue per unit of output
formula for average revenue
total revenue / quantity
define marginal revenue
change in output
explain why the average revenue and marginal revenue curves are this shape under perfect competition
firms in perfect competition are price takes meaning the price is set by the market, and one individual firm is too small to affect the price. so the firms do not need to reduce price in order to sell more and so average and marginal revenue are constant as each extra unit is sold at the same price
how does revenue affect decision-making by firms
revenue is part of profit, so as firms are profit maximisers revenue will affect profit.
what shape is a total revenue curve
a negative x^2 parabola
what shape would an average and marginal revenue curve be
AR - shallower demand curve
MR - steeper demand curve
explain why the MR and AR curves are this shape
because firms are price makers, so to sell more of their product they have to reduce the price
define normal profit
the amount of profit needed to keep the factors of production in their current use
define supernormal profit (formula too)
it is the profit over and above normal profit.
Supernormal profit = total revenue - total costs
what is the profit maximising condition
Marginal cost = marginal revenue
what is meant by an economic loss
where total costs are higher than total revenue
what is the short run shut down position
where a firm is not able to cover their total variable cost with their revenue
what is the long run shut down position
a firm will shut down if they are not able to cover all their costs in the long run
explain the role of profit in an economy
it acts as an incentive for risk taking amongst firms, and as a signal for firms to enter or leave a market
