Chapter 4 Flashcards
What is production
Converts inputs or factor services into outputs of goods and services
What are factors of production
Inputs into the production process, such as land, labour, capital and enterprise
What is the productivity gap
The difference between labour productivity e.g in the uk and in other developed economies
What is productivity
Output per unit of input
What is labour productivity
Output per worker
What is capital productivity
Output per unit of capital
What is a firm
A productive organisation which sells its output of goods and of services commercially
What is specialisation
A worker only performing one task or a narrow range of tasks. Also different firms specialising in producing different goods or services
What is the division of labour
This concept goes hand in hand with specialisation. Different workers perform different tasks in the course of producing a good or services
What is trade
The buying and selling of goods and or services
What is exchange
To give something in return for something else received. Money is a medium of exchange
What is the marginal returns of labour
The change in quantity of total output resulting from the employment of one more worker holding all the other factors of production fixed
What is the law of diminishing marginal returns
A short term law that states that as a variable factor of production is added to a fixed factor of production, both the marginal and eventually the average returns to the variable factor will begin to fall
What is total returns
The whole output produced by all the factors of production including labour employed by a firm
What is average returns of labour
Total output divided by the total numbers of workers employed
What is returns to scale
The rate by which output changes if the scale of factors of production is changed
What is a plant
An establishment such as a factory, a workshop or retail outlet, owned by and operated by a firm
What is increasing returns to scale
When the scale of all the factors of production employed increases, output increases at a faster rate
What is a fixed cost
Cost of production which in the short run does not change with output
What is a variable cost
Cost of production which changes with the amount that is produced even in the short run
What is total cost
All the cost incurred when producing a particular size of output
What is average variable cost
Total variable cost divided by the size of output
What is marginal cost
Addition to total cost resulting from producing one additional unit of output
What is average fixed cost
Total cost of employing the fixed factors of production to produce a particular level of output divided by the size of output
What is average total cost
Total cost of producing a particular level of output divided by the size of output
What is economies of scale
As output increases long run average cost falls
What is diseconomies of scale
As output increases long run average cost rises
What are internal economies and diseconomies of scale
Changes in long run average costs of production resulting from changes in the size of scale of a firm or plant
What is an external economy of scale
A fall in long run average costs of production resulting from the growth of the market or industry of which the firm is a part
What is an external diseconomies of scale
An increase in long run average costs of production resulting from the growth of the market or industry of which the firm is a part
What is total revenue
All the money received by a firm for selling its output
What is average revenue
Total revenue divided by output
What is marginal revenue
Addition to total revenue resulting from the sale of one more unit of the product
What is perfect competition
A market that displays six conditions of :
A large number of buyers and sellers
Perfect market information
Ability to buy or sell as much as desired at the ruling market price
The inability of a buyer or seller to influence the market price
A uniform or homogenous product
No barriers to entry or exit in the long run
What is a price taker
A firm which is so small that it has to accept the ruling market price. If the firm raises it price it loses all its sales if it cuts its price it gains no advantage
What is a price maker
When a firm faces a downward sloping demand curve for its product it possesses the market power to set the price at which it sells the product
What is a quantity setter
When a firm faces a downward sloping demand curve for its product it possesses the market power to set the quantity of the good it wishes to sell
What is profit
The difference between total sales revenue and total costs of production
What is profit maximisation
Occurs at the level of output at which total profit is greatest
What is normal profit
The minimum profit a firm must make to stay in business which is however insufficient to attract new firms into the market
What is abnormal profit
Profit over and above normal profit
What is technological change
A term used to describe the overall effect of invention, innovation and the diffusion or spread of technology in the economy
What is invention
Making something entirely new something that did not exists before at all
What is innovation
Improves on or makes a significant contribution to something that has already been invented thereby turning the results of invention into a product
What is productive efficiency
For the economy as a whole occurs when it is impossible to produce more of one good without producing less of another
For a firm it occurs when the average total cost of production is minimised
What is dynamic efficiency
Measures improvements in productive efficiency that occur in the long run over time
What is monopolistic competition
A market structure in which firms have many competitors but each one sells a slightly different product
What is creative destruction
Capitalism evolving and renewing itself over time through new technologies and innovations replacing older technologies and innovations
Name the several types of internal economies of scale
Technical economies of scale Managerial economies of scale Marketing economies of scale Financial or capital raising economies of scale Risk bearing economies of scale Economies of scope
Name the several types of diseconomies of scale
Managerial diseconomies of scale
Communication failure
Motivational diseconomies of scale
Technical economies of scale are caused by
Indivisibilities The spreading of research and development costs Volume economies Economies of massed resources Economies of vertically linked processes
What is indivisibilities?
Many types of plant or machinery are indivisible in the sense that there is a certain minimum size below which they cannot efficiently operate
What’s the spreading research and development costs ?
Large plants research and development costs can be spread over a much longer production run reducing unit costs in the long run
What are volume economies
Costs increase less rapidly than capacity
Industries such as transport, storage and warehousing
What are economies of massed resources?
Operation of a number of identical machines in a large plant means that proportionately fewer spare parts need to be kept than when the fewer machines are involved
What are economies of vertically linked processes
Linking of processes in a single plant can lead to saving in time, transport costs and energy
What are managerial economies of scale?
Large the scale the firm the greater its ability to benefit from the specialisation and division of labour within management
What is marketing economies of scale?
Bulk buying and bulk marketing
can use market power to buy supplies at lower prices
What are financial and capital raising economies of scale?
bulk borrowing of financial funds to finance business expansion
larger firms can borrow at lower interest rates
What are risk bearing economies of scale?
large firms are usually less exposed to risk than small firms because risks can be grouped and spread
What are economies of scope?
factors that make it cheaper to produce a range of products together than to produce each on of them on its own
What are some internal diseconomies of scale?
Managerial diseconomies of scale
communication failure
motivational diseconomies of scale
What is managerial diseconomies of scale?
as a firm grows in size administration of the firm becomes more difficult
delegation of managerial functions to people lower in the organisation who lack appropriate experience
what is communication failure?
in a larger organisation there may be too many layers of management between the top managers ordinary production workers
What is motivational diseconomies of scale?
With large firms it is often difficult to satisfy and motivate workers
What is the role of profit in market economy?
- the creation of worker incentives
- the creation of shareholder incentives
- profits and resource allocation
- profit as a reward for innovation and risk taking
- profit as a source of business finance
