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Mircroeconomics - 4.1 Individuals , Firms , Markets and Market Failure > 4.1.4 - Production, Costs and Revenue > Flashcards

4.1.4 - Production, Costs and Revenue Flashcards

1
Q

What is the short run in terms of production

A

A period of time in which the availability of at least one factor of production is fixed (usually capital)

Fixed means it cant be changes easily

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2
Q

What is the long run in terms of production

A

A period of time which all of the factors of production can be varied

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3
Q

What does short and long run symbolise

A

It is not about a specific time

It is about the scale of production

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4
Q

Define marginal product

A

Is the extra output gained from hiring an additional unit of input (labour)

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5
Q

Define the law of diminishing marginal returns

Give an example

A

Where at a certain point an additional factor of production causes a relatively smaller increase of output

In a cafe when extra employees may lead to a lack of space and a decrease in output occurs

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6
Q

Where does diminishing marginal return occur for a business

A

Occurs in the short run when at least one factor of production is fixed.

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7
Q

What is the formula for average product

A

= total product / units of labour

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8
Q

What is the formula for marginal product

A

= change in total product / change in quantity of labour

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9
Q

Define total production

A

The total output of goods and services

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10
Q

Define productivity

A

The rate of production by one or more factors of production

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11
Q

What is the formula for productivity

A

Total output per period of time / number of units of FOP

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12
Q

Define specialisation

A

Where an individual worker, firm or country provides a limited range of goods and services

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13
Q

What is division of labour

A

Is specialisation at the level of an individual worker

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14
Q

What are the benefits of specialisation

A

Repetition of a limited range of activities can increase skill
Increased productivity as less time wasted moving between stations
Division of labour allows people to focus on their strengths

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15
Q

Define costs

A

Are the expenses a business must pay to secure the factors of production and obtain raw materials

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16
Q

What are fixed costs

A

Are costs of production which do not vary with the level of output in the short run

E.g. Rent and Insurance

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17
Q

What are variable costs

A

Costs which vary directly with the businesses level of output

E.g. Wages and Raw materials

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18
Q

What is the formula for average total costs

A

Total costs / output

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19
Q

What is the formula for average fixed costs

A

Fixed costs / output

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20
Q

What is the formula for average variable costs

A

Variable costs / output

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21
Q

What is marginal cost

What does it mean

A

Is the additional cost of making an additional unit of output

There becomes a point where output is not increasing but the marginal cost continues to increase

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22
Q

What is the formula for marginal cost

A

= Change in total costs / change in output

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23
Q

What is the relationship between marginal costs and marginal product

A

They are inversely proportional

This means that the marginal costs increase when there becomes a decrease in the marginal product (decrease in level of output) due to the law of diminishing return

24
Q

What is the relationship between marginal product and total product

A

When marginal product = 0 ,total product is maximised

25
Q

Why is the average fixed cost curve the way it is

A

As its costs do not change with output, as output grows the cost is spread so the AFC curve decreases with increased output

26
Q

Why is the Average Variable Cost Curve the shape it is

A

There becomes a point where variable costs reach the point of the law of diminishing return and the AVC starts to rise to be able to i crease output , due to increased wages and raw materials for example

27
Q

Why is the Average Total Cost Curve the shape it is

A

Is determined by the average variable cost curve and average fixed cost curve. It is influenced more by the AVC as it becomes a greater cost than the AFC

28
Q

Why does the marginal cost curve cut the ATC and AVC curves at its minimum

A

When the MC curve rises due to the law of diminishing return it causes the ATC and the AVC to rise as well as they are averages, an extra unit which is bigger than the average will cause the average to rise as well

29
Q

What are the causes for short run costs to shift

Give examples for :

i. Increase in the price of capital
ii. If wages increase because of a rise in minimum wage

A

Increases through the individual costs of fixed costs or variable costs

Increase in capital price leads to increase average fixed costs and therefore leads to increased average total costs

Increased wages leads to increased average variable costs and therefore increased average total costs and marginal costs

30
Q

Define total revenue

A

Is the money a firm receives from selling its output

31
Q

What is the formula for total revenue

A

Total revenue = price x quantity

32
Q

What is the formula for average revenue

What does AR also mean

A

= Total revenue / quantity

Average revenue = price

33
Q

Define marginal revenue

A

The addition to a firms total revenue from selling an additional unit of output

34
Q

What is the formula for marginal revenue

A

= change in total revenue / change in output

35
Q

What are the advantages and disadvantages of specialistion

A

A
Economies of scale
Higher productivity
Higher quality products

D
Specialised firms are not flexible
Workers may become bored (lack of motivation)

36
Q

How does the marginal revenue curve work

A

Marginal revenue decreases when output is increased. There are smaller increases in revenue at each level of output

37
Q

What is the relationship between marginal revenue and total revenue

A

When marginal revenue = 0 Total revenue is maximised

Total revenue continues to increase until marginal revenue is less than 0, because then they would be losing revenue.

38
Q

Define Normal profit

Give an example of it

A

Is a situation where a firm makes enough profit to reward the entrepreneur for taking the risk and is to remain competitive. It implies zero economic profit

An example is that the owner could have made a salary of £50,000 in a normal job, therefore the entrepreneur needs to make £50,000 salary, included as a cost for the business

39
Q

What is the formula for normal profit

Where does it occur in a graph

A

Normal profit is when total revenue = total costs

Occurs at an output where AR=AC

40
Q

Define supernormal/economic profit

How do they know they are making it

A

Is profit above normal profit.

A firm is making supernormal profit if they have excess profits of what they need to remain competitive.

41
Q

Define returns to scale

A

Is the relationship between increasing the firms inputs and the change it has on output

42
Q

Explain increasing returns to scale

A

Is when a firms outputs have a greater change than its inputs

Decrease in AC

43
Q

Explain constant returns to scale

A

When a firms outputs are identical to its inputs

AC stays the same

44
Q

Explain decreasing returns to scale

A

When a firms outputs are less than the change in inputs

AC increase

45
Q

Define Economies of scale

A

Is the reduced average total costs that firms experience by increasing its output in the long run

46
Q

What is the link between returns to scale and economies of scale

A

Economies of scale cause decreased AC and therefore increasing returns to scale

Diseconomies of scale increase the AC causing decreasing returns to scale

47
Q

What is the minimum efficient scale

A

The lowest level of output at which average costs are minimised

48
Q

What are internal economies of scale

A

Are reductions in long run average costs arising from growth of the firm

49
Q

What are the different internal economies of scale

A

Financial economies of scale : large firms are more likely to be offered cheaper loans wit low interest rates , reducing costs
Bulk buying- large firms buy in larger quantities, reducing the average cost
Technical economies of scale- large firms will invest in new technology as its cost effective
Marketing economies of scale- large firms have big advertising budgets which are spread out due to large output
Managerial economies of scale - large firms can use division of labour to achieve high productivity, reducing costs

50
Q

What are external economies of scale

Give examples

A

Are reductions in long run average costs arising from the growth of the industry it operates in

E.g. better transport infrastructure , supplier moving closer

51
Q

What are diseconomies of scale

A

When a firm has an increase in its average costs by increasing output in the long run

52
Q

What are the reasons for diseconomies of scale (acronym )

A

3c’s and a M

Control - large businesses can lose control, less productivity
Communication - hard to communicate in large firms , time is wasted and there is less productivity
Coordination - hard to work together between departments in large firms
Motivation - lots of workers makes the individual worker feel less valued, less productivity

53
Q

Explain the shape of the long run average cost curve

A

It is the joining of all the minimum points of the Short run average costs as they represent the possible points of production over time

54
Q

Define Invention

A

Is the creation of a product or process

55
Q

Define innovation

A

Is where products and production processes are developed into marketable goods or services

56
Q

What are the effects of technological change

A

Can reduce firms long run costs

Can make markets more competitive

57
Q

Define creative destruction

A

Is where technological change leads to development of new disruptive products which change existing products

Mircroeconomics - 4.1 Individuals , Firms , Markets and Market Failure (8 decks)

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