Background to supply Flashcards
Define fixed factor
An input that cannot be increased in supply within a given time period.
Define variable factor
An input that can be increased in supply within a given time period.
What is short run?
The period of time over which at least one factor is fixed.
What is long run?
The period of time long enough for all factors to be varied.
Define total physical product (TPP)
The total output of a product per period of time that is obtained from a given amount of inputs.
Define average physical product (APP)
Total output (TPP) per unit of the variable factor in question: APP = TPP/Qv.
Define marginal physical product (MPP)
The extra output gained by the employment of one more unit of the variable factor: MPP = ∆TPP/∆Qv.
What is technical efficiency?
Where the maximum output is achieved from a given set of inputs.
State the law of diminishing marginal returns
When one or more factors are held fixed, there will come a point beyond which the extra output from additional units of the variable factor will diminish.
State the relationship between averages and marginals
The marginal is just the ratio of the changes.
Define historic costs
The original amount the firm paid for factors it now owns.
Define fixed costs (TFC)
Total costs that do not vary with the amount of output produced.
Define variable costs (TVC)
Total costs that do vary with the amount of output produced.
Define average total cost (AC)
Total cost (fixed plus variable) per unit of output: AC = TC/Q = AFC + AVC.
Define average fixed cost (AFC)
Total fixed cost per unit of output: AFC = TFC/Q.
Define average variable cost (AVC)
Total variable cost per unit of output: AVC = TVC/Q.
Define marginal cost (MC)
The extra cost of producing one more unit of output: MC = ∆TC/∆Q.
Explain the opportunity cost of production decisions
The opportunity costs are the implicit and explicit costs that are relevant to that particular decision.
State the bygones principle
Sunk costs should be ignored when deciding whether to produce or sell more or less of a product.
Define economies of scale
When increasing the scale of production leads to a lower cost per unit of output.
Define specialisation and division of labour
Where production is broken down into a number of simpler, more specialised tasks.
Define Indivisibility
The impossibility of dividing a factor into smaller units.
Define plant economies of scale
Economies of scale that arise because of the large size of a factory.
Define Rationalisation
The reorganising of production so as to cut out waste and duplication and generally to reduce costs.
Define Overheads
Costs arising from the general running of an organisation, and only indirectly related to the level of output.
Define economies of scope
When increasing the range of products produced by a firm reduces the cost of producing each one.
Define diseconomies of scale
Where costs per unit of output increase as the scale of production increases.
Define external economies of scale
Where a firm’s costs per unit of output decrease as the size of the whole industry grows.
What is industry’s infrastructure?
The network that supports a particular industry.
Define external diseconomies of scale
Where a firm’s costs per unit of output increase as the size of the whole industry increases.
State three long-run decisions for a firm
The scale, location, and techniques of production.
Distinguish between returns to scale types
Increasing, constant, and decreasing returns to scale.
Describe factors leading to plant economies of scale
Specialisation, indivisible inputs, container principle, efficiency of large machines, by-products, multi-stage production.
Describe other possible economies of scale
Organisational, spreading overheads, financial economies, economies of scope.
Describe factors leading to diseconomies of scale
Management problems, worker alienation, industrial relations, production-line disruptions.
State factors influencing location choice
Transport costs, availability of raw materials.
State the cost-minimising condition
(MPP_L)/P_L = (MPP_K)/P_K for two-factor case.
Distinguish between time periods in production
Very short run, short run, long run, very long run.
Outline assumptions underlying long-run average costs
Factor prices given, state of technology and factor quality given, least-cost factor combination.
Explain the relationship between short-run and long-run average costs
In the long run, firms can adjust all inputs, leading to new SRAC curves.
Define minimum efficient scale (MES)
The scale beyond which no significant economies of scale can be achieved.
Define total revenue (TR)
A firm’s total earnings from a specified level of sales within a specified period.
Define average revenue (AR)
Total revenue per unit of output, equal to price when all output is sold at the same price.
Define marginal revenue (MR)
The extra revenue gained by selling one more unit per period of time.
Define price taker and price maker
A firm that cannot/can influence the market price.
Define the profit-maximising rule
Profit is maximised where marginal revenue equals marginal cost.
Define normal profit
The opportunity cost of being in business.
Define supernormal profit
The excess of total profit above normal profit.
Explain the short-run and long-run production decisions
In the short run, firms should produce if they can cover variable costs; in the long run, they should produce if they can cover all costs including normal profit.
