4.1.4 — Production, Costs And Revenue Flashcards
What are some differences between the short and long run (scale of production)?
Short run:
- scale of production is fixed
- quantity of Labour may be flexible
- quantity of capital is fixed
Long run:
- scale of production is flexible
- all costs are variable
What is the marginal return of a factor?
I.e Labour, is the extra output derived per extra unit of the factor employed
What is the average return of a factor?
The output per unit of input (output per worker over a period of time)
What is the total return of a factor?
The total output produced by a number of units of factors (i.e labour) over a period in time
What is the law of diminishing returns?
- diminishing returns only occur in the short run
- variable factor could be increased in the short run i.e firms might employ more labour which will be less productive over time
- therefore total output still rises but it increases at a slower rate
- links to how productive Labour is
- the law assumes firms have fixed factor resources in the short run and that the state of technology remains constant
What does it mean to return to scale?
The change in output of a firm after an increase in factor inputs
At what point does returns to scale increase?
When the output increases by a greater proportion to the increase in inputs
I.e if input doubles and output quadruples there is said to be increasing returns to scale
Works vice versa
Define constant returns to scale
When output increases by the same amount that input increases by
What is marginal revenue?
Marginal revenue is the extra revenue earned from the sale of one extra unit.
Difference between total revenue at different levels of output
Under what condition does marginal revenue equal average revenue?
When demand is elastic
How is marginal revenue calculated?
Change in total revenue
————————————
Change in quantity sold
Define normal profit
Minimum reward required to keep entrepreneurs supplying their enterprise (covers opportunity cost of investing funds into the firm compared to elsewhere
Formula for normal profit?
When
Total revenue = total costs
Is normal profit considered to be a cost or not?
It is considered a cost
Define supernormal profit
AKA abnormal profit / economic profit
The profit above normal profits which exceeds the value of opportunity cost of investing funds into the firm
Formula for supernormal profit?
Total revenue > total costs
Bullet point some roles of profit in a market economy
- in free market, profit is the reward that entrepreneurs yield when they make risks
- entrepreneurs want to avoid loss and make profit (to continue innovating) to reduce unit costs and maximise their profits
- profits can be retained (kept within firm) which acts as a source of finance for firms which avoids the cost of interest payments
- profit acts as a signal to firms and consumers (supernormal profit signals to firms to enter the market) which increases market supply and reduces cost (assumes low entry barriers)
- FOP typically get used in markets where the rate of return is higher
Define invention
The process of creating a new product or new way to make a product
Define innovation
The act of improving or contributing to existing products
Bullet point ways technological change can affect methods of production
- results in improvement of efficiency and productivity which could lower production costs
- leads to the development of new products
- increased quality
- development or destroying of markets
- creative destruction
What is creative destruction?
Coined by the economist Schumpeter, is the idea that new entrepreneurs are innovative which challenges existing firms. These firms become more productive to compete which forces the least productive firms out of the market.
I.e netflix vs blockbuster
What does creative destruction result in for an economy?
Expansion of economies productive potential
How can technological change influence the structure of markets?
- monopolies don’t have an incentive to innovate, as they have no competition meaning they may be inefficient with higher costs
- oligopolies tend to have a higher incentive to innovate as they are earning supernormal profits and try to get ahead of their competitors. Technological change is quite fast
Why does increasing returns to scale occur?
Because of economies of scale
What is increasing returns to scale?
When output increases by a greater proportion to the increase in inputs (I.e. if input doubles, output quadruples)
So price taker firms have a vertical or horizontal AR curve?
Horizontal which shows the perfectly elastic demand for their goods
What is the relationship between average revenue and marginal revenue?
When demand is perfectly elastic, marginal revenue = average revenue
What are some alternative objectives of profit for firms?
- customer service
- high quality goods
- survival
- satisfying customers
Define technical change
The overall effect of invention, innovation and the diffusion or spread of technology in the economy
Define disruptive innovation
Something that helps to create a new market, but it it disrupts an existing market over several years as a result, thereby displacing an earlier technology
Define creative destruction
Used to describe capitalism evolving and renewing itself over time through new technologies and innovations, replacing old technologies and innovations
Define mechanisation
The process of moving from labour-intensive production to a capital-intensive method of production:
MORE MACHINES, FEWER WORKERS
Define automation
Automatic control where machines operate other machines
