Chapter 8 Flashcards
Efficient production a.k.a
cost reduction
What is production function
a technological relationship that specifies how much output
can be produced with specific amounts of inputs
2 types of efficiency
Technological efficiency
Economic efficiency
What is technological efficiency
means that the maximum output is produced with the given
set of inputs.
Economic efficiency is
defines a production structure that produces output at least cost
What is the driving force in the modern economy
Cost reduction
New technologies
Mergers and acquisitions (merged companies are more efficient)
What is short run, long run and very long run
Short run: a period during which at least one factor of production is fixed. If capital
is fixed, then more output is produced by using additional labour. (labor or capital can be fixed). A software development company may be able to install new capital
(computing power) instantaneously but have to train new developers. In such a case capital is
variable and labour is fixed in the short run.
Long run: a period of time that is sufficient to enable all factors of production to be
adjusted.( build new classrooms and hire new teaches)
Very long run: a period sufficiently long for new technology to develop
Total product is the relationship between
Total output (Q)and the number of workers (L) for a given amount of capital ( at the dame plant for example) Q=f(L)
Marginal product is
The addition to output produced by each additional worker
MP=delta Q/delta L
additional output as the marginal product (MP) of
an additional worker
Average product is
The relationship between output per worker and the number of workers employed
AP=Q/L
AP and MP intersect at
Maximum of AP
if MP>AP then AP increases
of MP
What is the law of diminishing returns
With capital fixed,marginal product must eventually decline
MP(L) also ____ of the TP curve
Slope
The average product must increase if the marginal ___
the average and must decline if the marginal is ____the average.
exceeds
less than
This declining MP is due to the constraint of ___
a fixed number of machines
Why does the MP curve intersect the AP curve at the maximum of the AP curve
If the maximum daily temperature in Whitehorse up to May 31 has averaged 8 degrees Celsius and the temperature on June 1 is 15 degrees (the marginal temperature), then the average including June 1 necessarily increases
If the average max up to September 30 is 12 degrees and the temperature on Oct 1 is 6 degrees (the marginal value), then the average including October 1 must decline
Fixed, variable and total costs
fixed, variable, and total costs to define the cost structure of a firm. Fixed costs do not vary
with output, whereas variable costs do, and total costs are the sum of fixed and variable costs
How to calculate average fixed/ variable cost
total (fixed or variable cost) divided by output
Marginal cost is
The cost of producing each additional unit of output
MC=deltaTC/deltaQ
Also MC=deltaTVC/delta Q, because fixed costs are fixed
why AVC usually decreases at first, but then increases
The variable cost, which represents
the cost of labour, is constant per unit of labour, because the wage paid to each worker does not
change. However, each worker’s productivity varies. Initially, when we hire more workers, they
become more productive,, then productivity declines
If the marginal product of labour ____, then the marginal cost of output declines;
If the marginal product of labour ___, then the marginal cost of output increases.
increases
declines
fixed costs are ___ of total costs at low output levels, but
become ___ at higher output levels. Unlike, ___
The dominant component
less dominant
average variable costs, note that the average
fixed cost must always decline with output, because a fixed cost is being spread over more units of
output.
MC curve intersects with ATC and AVC curve at and with AP at
The latter minimum
AP-maximum
When the marginal cost is less than the average cost, the average cost must ____;
When the marginal cost exceeds the average cost, the average cost must ___.
decline
increase
How companies try to assess to hire or not
they attempt to assess the contribution of
each team in their organization to costs and revenues, and on that basis determine the appropriate
number of employees.
If the firm cannot make a profit, should it shut down?
If it can cover its variable costs, having already sunk its fixed costs, it should stay in production
What is a sunk cost
a fixed cost that cannot be recovered, even via a shutdown
Example of fixed costs that are not sunk
machinery that has been purchased may have a market value
Examples of sunk costs nowadays
R and D
What should you do if you salary is lower as a entrepreneur than it could be on the other job
ultimately he must recognize that the survival of the business should not
depend upon his drawing a salary that is less than his opportunity cost. ,
if he underpays himself in order to avoid shutting down, he might be better off in the long run to
close the business and earn his opportunity cost elsewhere in the marketplace
When production costs decline?
When the scale of the operation initially increases- economic scale
reasons why scale
economies are encountered.
One is that production flows can be organized in a more efficient
manner when more is being produced. Another is that the opportunity to make greater use of task
specialization presents itself; for example, Black Diamond Snowboards may be able to subdivide
tasks within the laminating and packaging stations
The further a cost
curve is located to the ___of the diagram the larger the production facility it defines, given that
output is measured on the horizontal axis
right
What happens to ACT curve when making the plant larger makes it less efficient in cost
It moves to the right and up
How to recognize that we do not need to increase the production
Similarities of ATC0 and ATC1, so we have almost exhausted the possibilities
of further scale advantages once we build a plant size corresponding to ATC0
What is dieconomies of scale
If we increase the scale of this firm to extremely high output levels, unit costs will be higher
What are increasing, constant and decreasing returns to scale
Increasing returns to scale implies that, when all inputs are increased by a given
proportion, output increases more than proportionately.
Constant returns to scale implies that output increases in direct proportion to an
equal proportionate increase in all inputs.
Decreasing returns to scale implies that an equal proportionate increase in all inputs
leads to a less than proportionate increase in output.
Explain in words and on the example of snowboard business expansion about increasing, decreasing and constant returns
if a
40% increase in capital and labour use allows for better production flows than when in the smaller
plant, and therefore yields more than a 40% increase in output, this implies that the cost per snowboard
produced must fall in the new plant. In contrast, if a 40% increase in capital and labour leads
to say just a 30% increase in output, then the cost per snowboard in the new larger plant must be
higher. Between these extremes, there may be a range of relatively constant unit costs, corresponding
to where the production relation is subject to constant returns to scale.
What is minimum efficient scale
that output level at which the LATC is a
minimum, indicating that further increases in the scale of production will
not reduce unit costs.
Minimum efficient scale defines a threshold size of operation such that scale
economies are almost exhausted
What is LATC
Long-run average total cost is the lower envelope of all the short-run ATC curves
LATC = (Long-run total costs)/Q = LTC/Q
LRAC=LATC
The particular range of output on the LATC where it begins to flatten out is called ___
the range of
minimum efficient scale.
Where the LATC declines there
are ___, where the LATC is flat there are ___, where the LATC slopes upward there are ___
IRS
CRS
DRS
Look at table 8.3 in the text and explain what is happening
A small plant requires lower fixed costs; hence cost per unit of output must be less than for a larger plant (with higher fixed costs) when low output levels are produced
However, with larger output a plant that relies more on automation – and hence more capital and more capital costs – may produce at a lower unit cost at high output levels. This means the AC is lower for this plant at such output levels
The critical point is that high output volumes are required in order to spread the higher capital costs
if the manufacturer believes he can produce
at least 200 vehicles his unit costs will be less with the plant involving robots; but at output levels
less than this his unit costs would be less in the labour-intensive plant
LATC curve never
Increases
What is technological change
represents innovation that can reduce the cost of production or
bring new products on line.
What is globalization
the tendency for international markets to be ever more integrated
Drivers of globalization
lower transportation and communication
costs, reduced barriers to trade and capital mobility, and the spread of new technologies
that facilitate cost and quality control.
How technology influence LRAC
Shift downward and a little to the right
Technology decreases the unit production cost for any output produced and may increase the minimum efficient scale threshold
Cluster is
a group of firms producing similar products, or engaged in similar research.
Clusters give rise to externalities,
frequently in the form of ideas that flow between firms, which in turn result in cost reductions and
new products.
What is learning by doing concept
Learning by doing can reduce costs. A longer history of production enables firms to
accumulate knowledge and thereby implement more efficient production processes.
What is economies of scope
Economies of scope occur if the unit cost of producing particular products is less
when combined with the production of other products than when produced alone ( first aid, dental care and baby care products are produced together in Proctor and Gamble)
The diminishing marginal returns area is found where
The MP is decreasing but still above 0
The negative marginal returns are is found where
The MP curve is below 0
MP has its maximum where
The slope of the total product curve in graph (A) reaches its maximum
MP is zero when
When TP curve reaches its maximum
The marginal cost curve first declines and then increases because of
Increasing, then diminishing, marginal returns (marginal product)
Whenever marginal product increases, marginal cost will
decrease
Calculating long term ATC curve
Total cost by quantity
MC is the flipside of __ ,when AVC is the flipside of ___
MP
AP
LRAC must intersect LRMC at minimum of __
LRAC
