Chapter 4 Flashcards
Explain the production theory short run and long run
Short run- Law of diminishing returns
Long run- Returns to scale
Define productivity
Output per unit of input
Define labour productivity
Output per worker
Define capital productivity
Output per unit of capital
What is the UK productivity puzzle
Failure of labour productivity to recover from a relatively low level compared to others
Define firm
Productive organisation which sells its output of goods and or services commercially
Define specialisation and division of labour
Specialisation: worker only performing one task or a narrow range of tasks
Division of labour: In a firm many workers perform different tasks in producing a good or service
What are the benefits of division of labour
- No need of switching between tasks
- More and better machinery or capital can be employed
- Practice makes perfect
Difference between trade and exchange
Trade: buying and selling of goods and service
Exchange: to give something in return for something else recieved
Explain short run law of diminishing returns
Short-run law which states that as a variable factor of production is added to a fixed factor marginal and average returns diminishes
Define marginal returns of labour
Change in the quantity of total output resulting from the employment of one more worker
Difference between short and long run
Short run- at least one fixed factor of production
Long run- all factors are variable
Draw law of diminishing returns (TR, MR, AR)
…
Define total returns, average returns
Total returns: the whole output produced by all factors of production employed by a firm
Average returns: Total output/ total n of employed
What is returns to scale
The rate at which output changes if the scale of all the factors of production is changed
Define the 3 kinds of returns to scale
Increasing: Output is proportionally higher than input
Constant: Output is proportional to input
Decreasing: Output is proportionally lower to input
Explain the difference between short and long run costs of production
Short run: Fixed + variable
Long run: Variable
Draw Returns and Cost graph (MR, AR, MC, AVC)
…
Difference between total, average and marginal cost
Total: All costs incurred when producing a particular size
Average: Total cost / number of workers
Marginal: Cost by each additional worker
Draw short run average cost curve (AFC, AVC, ATC,MC)
…
What is a business objective
Profit maximise
What is assumed that a firm will do if cost of labour cost is high
Less labour will be employed and capital becomes more attractive
Explain economies of scale
As output increases long run average cost falls
Explain diseconomies of scale
As output increases, long run average cost rises
Draw Economies and Diseconomies of scale
…
Draw Economies and diseconomies of scale with LRAC and SRATC
And explain
SRATC represents a particular firm size
Long run, firm will move from one to another short run average total cost curve
LRAC curve forms a tangent to the SRATC
Explain internal and external economies and diseconomies of scale
Internal Economies and diseconomies : Changes in long run average costs of production due to changes in size or scale of firm or plant
External Economies: Changes in long run average costs of production due to growth of market or industry of which the firm is a part
Reasons for internal economies of scale
- Technical (indivisibilities)
- Managerial
- Marketing (bulk buying and bulk selling)
- Financial or capital raising
- Risk bearing (Less risk as higher firm)
- Economies of scope (range of goods)
Reasons got internal diseconomies of scale
- Managerial
- Communication failure
- Motivational
What is the relationship between returns to scale and (dis)economies of scale
Higher returns to scale=economies of scale
Reasons for economies and diseconomies of scale
clustering of individuals- competition, more trained
Draw different kinds of economies and diseconomies of long run average cost curve
- Normal
- Horizontal LRAC
- Quick slope up to Diseconomies of scale
- Slow slope up to Diseconomies of scale
What is long run marginal cost
Additional cost incurred if firm increases output when all factors are variable
What is the L shaped long run average cost curve
No Diseconomies of scale, MES (minimum efficient scale)
Define MES
Lowest output at which long run average costs have been reduced to fully benefit from economies of scale
Difference between:
Total revenue-
Average revenue-
Marginal revenue-
Total revenue- all money received by a firm from selling its output
Average revenue- Total revenue / output
Marginal revenue- Addition to total revenue resulting from an additional sale
Explain what are the conditions of Perfect competition
- Large number of buyers and sellers
- Perfect information
- Consumers can buy as much as they want and producers sell as much as they want at the market ruining price
- Homogenous products
- No barriers to entry or exit
Draw a competitive firm as being a price taker
…
Draw Revenue in a monopoly (AR, MR)
aswell as gain and loss of revenue
…
Why does Demand = AR
Because each additional revenue is the same due to being the demand
Explain a monopoly as a price maker and quantity setter
Price maker- firm possesses marker power to sell at any price
Quantity setter- possesses marker power to set the quantity of a good
Relationship between marginal and total revenue
As marginal revenue increase total increases by same increment
What is profit
Revenue - cost
Define profit maximisation
Level of output at which total profit is greatest
Difference between normal and abnormal profit
Normal- Minimum amount a profit must make to stay in business
Abnormal- profit over and above normal
Role of profit in an economy
- Creation of worker incentive
- Creation of shareholder incentive
- Profit for innovation and risk taking
- Business finance
Define technological change
Describe overall effect of invention, innovation and spread of technology in an economy
Difference between technological change and technological progress
Technological change: improving welfare
Technological progress: Scientific improvement, not necessarily about welfare
Difference between invention and innovation
Invention: Making something entirely new
Innovation: Making a significant contribution to something already invented
What effect does technological change have on economic performance
- Methods of production
- Productivity
Define productive efficiency
Impossible to produce more of one good without less of another
Define Dynamic efficiency
Measures improvement in productive efficiency in the long run
Define creative destruction
Capitalism evolving and renewing itself over time through new technologies and innovations replacing older ones
