basics Flashcards
law of diminishing returns
states that in the short run when variable factors of production are added to a stock of fixed factors of production
total marginal product will initially rise then fall
short run
when there is at least one fixed factor of production
why does marginal product initially rise
labour productivity increases
i) sepcialisation
ii) under utilisation of fixed FoP
why does marginal product decrease
labour productivity decreases
-fixed FoP constrain production ( area, No. of equipment etc.)
long run
when all factors of production are variable
two types of costs
-explicit costs
-implicit costs
explicit costs
fixed costs-
-rent, salaries, intrest on loans, advertising etc.
variable costs-
-wages, utility bills, raw material costs, transport costs etc.
implicit costs
opportunity costs
profit they coulve made doing the next best alternative
AFC equation
TFC / Q
OR
AC - AVC
AVC equation
TVC / Q
OR
AC - AFC
Marginal costs
the change in total production costs that comes from making or producing one additional unit
average costs
total costs of production divided by the number of goods produced
law of diminishing returns and marginal costs
initially decreases due to increased labour productivity but eventually increases due due a decrease in labour productivity
returns to scale
if a business is increasing FoP theyre scaling up
what is the change in output when we increase FoP
increasing
decreasing
constant returns to scale
%△ output > %△input
%△ output < %△input
%△ output = %△input
Minimum efficient scale
lowest output required to exploit full economies of scale
economies of scale
a reduction in LRAC as output increases
the cost advantages companies gain from increasing their output
internalised economies of scale
Really Fun Mums Try Making Pies
Risk bearing - can spread risk over a large output
Financial - can negotiate lower interest rates as they become more reputable
Managerial - as firms get larger specialist managers can boost productivity
Technical - specialist machinery boosts productivity - has a cost
Marketing - as it grows larger, bulk buy advertising
Purchasing - buy raw materials in bulk, unit discounts as firms grow
external economies of scale
-better transport infrastructure - reduces costs
-component suppliers move closer as firm grows, in supplier interest to move closer
-R+D firms move closer
diseconomies of scale
an increase in LRAC as output increases as businesses get too big
reasons for diseconomies of scale
3C’s and an M
Control - too many workers, lower productivity and supervision
Communication - takes time to spread messages
Coordination
Motivation
perfect competition
-many buyers and sellers (infinite)
-homogenous goods (identical)
-firms are price takers
-no barriers to entry
-perfect information
imperfect competition
-few buyers and sellers
-differential goods
-firms are price makers
-high barriers to entry/ exit
-imperfect information
difference between economic and accounting profit
economic profit considers explicit ands implicit costs while accounting only considers explicit costs
normal profit
minimum level of profit required to keep FoP in their current use AR = AC
supernormal profit
any profit made above normal profit
AR > AC
subnormal profit
any economic profit below normal profit
AR < AC
