chapter 8: Production and costs Flashcards
what is the driving force of the modern economy
efficiency (efficient production)
what are the forms of efficient production
cost reduction
new technologies
margers and acquisitions
cost reduction
may come through collapsing jobs
or outsourcing particular jobs to lower-wage economies
new technologies
Can we replace old work patterns with the help of communications? Or with robots?
mergers and acquisitions
justified by claiming that a merged company will be more efficient
production function
technological relationship
specifies how much output can be produced with specific amounts of inputs
technological efficiency
maximum output is produced with the given set of inputs
economically efficient production structure
produces output at least cost
what are the types of time frames
short run
long run
very long run
short run
At least one factor of production is fixed
usually we consider capital to be fixed cost and labour variable cost
ex: We can increase output - ‘teach more students’ – by employing temporary teachers, and using classrooms outside normal hours
long run
All factors of production can be adjusted
ex: perhaps we will build more classrooms
very long run
New technology appears
another ex again with students: and we teach additional students on-line and so avoid adding new physical capital
Types of product in a short run production
total product (TP)
Marginal product (MP)
Average product (AP)
Total product (TP)
the relationship between total output (Q) and the number of workers (L) employed holding the capital stock fixed
It states that output is a function of L, with K fixed:
Q= f(L)
Marginal Product (MP)
addition to output produced by each additional worker
MP = ΔQ / ΔL
Average product (AP)
relationship between output per worker and the number of workers employed
AP = Q / L
law of diminishing returns
With capital fixed, marginal product must eventually decline
you hire too many people who get paid the same
productivity declines cause theres too many unrproductive staff
What happens if the marginal product (MP) is bigger than Average product (AP)
MP > AP then AP is increases
What happens if the marginal product (MP) is smaller than Average product (AP)
MP < AP then AP decreases
Where does the MP curve interest the AP curve
At the maximum of the AP curve
Type of costs in the short run
fixed costs
variable costs
total costs
marginal costs
fixed costs (FC)
Costs that are independent of the level of output
ex: Overhead costs or research and development
Average fixed cost (AFC):
AFC = FC/Q
variable costs (VC)
Costs that are directly related to the output produced
Example: Labour costs, material costs
Average variable cost (AVC)
AVC = VC/Q
total costs (TC)
vertical Sum of fixed costs and variable costs
TC = FC + VC
Average Total Cost (ATC) is TC per unit of output
ATC = TC/Q ATC = AFC + AVC
Marginal cost (MC)
The cost of producing each additional unit of output
MC = ΔTC/ΔQ
Also MC = ΔTVC/ΔQ because fixed costs are fixed
where does marginal costs (MC) intersect ATC and AVC
at their minumum
When MC = ATC, then ATC rises
Same relationship between MC and AVC
MP intersects AP at max AP
MC intersects ATV and AVC at their minimum
is there a relationship?
yeeee boooy
when productivity is at highest cost
The MC is the ‘flipside’ or inverse of the MP
the AVC is the ‘flipside’ or inverse of the AP
sunk cost
fixed cost that cannot be recovered, even via a shutdown
ex: Mining operations - setup costs are ‘sunk’ and usually form a substantial component of total costs
Not all fixed costs are sunk
Ex: machinery that has been purchased may have a market value
what permits all factors of production to vary
long-run analysis
scale of output
the level of production given that the capital stock
capital stock can be increased or decreased to fit the expectations for sales in the long run
types of scales in the long run production and costs
scale of output
increasing returns to scale
constant returns to scale
decreasing returns to scale
minimum efficient scale
increasing returns to scale (IRS)
When all inputs are increased by a given proportion, output increases more than proportionately
at the beginning of the long run ATC curve
implies declining LAC
LMC < LAC
constant return to scale (CRS)
Output increases in direct proportion to an equal proportionate increase in all inputs
around the middle of the long run ATC curve
where LAC = LMC
decreasing returns to scale (DRS)
An equal proportionate increase in all inputs leads to a less than proportionate increase in output
at the end of the long run ATC curve
implies increasing LAC
LMC > LAC
minimum efficient scale
A threshold size (operating level) such that no further economies of scale can be realized
what is the long run ATC curve?
what does it represent In a graph?
the lower envelope of all possible short-run ATC curves
what results in a declining LAC?
If the prices of K and L are fixed
Increasing returns to scale (IRS) results in a declining LAC (long run average cost)
what results in a increasing LAC?
CRS implies constant LAC (long run average cost) and
decreasing returns to scale (DRS) implies increasing LAC
how are the returns to scale defined
defined in terms of the LAC (long run average cost) curve
ex: A phase of linearly declining MC followed by constant MC followed by linearly increasing MC
what is required to spread the higher capital costs?
high output volumes
basically economies of scale
where does the LRAC have to intersect LRMC
at minimum of LRAC
technological change and globalization
Reduce costs and increase the point of minimum efficient scale
graphically this shifts the minimum of the LRAC rightwards and downwards
clusters and externalities
Groups of like firms or workers exchanging information and ideas
ex: Silicon Valley
learning by doing
Costs decline over time due to learning
incumbents have a cost advantage
economies of scope
Multiproduct supply may be less costly than single product supply
what can technological change achieve regarding costs?
reduces the unit production cost for any output produced
may also increase the minimum efficient scale (MES) threshold
can we measure the marginal productivity of individual workers?
nah boy, the marginal productivity of a team
When doe the marginal Product reach its maximum? (if there is relatively gyu production)
when the slope of the Total Product curve is at the max steepness
(if there is relatively gyu production)
when is marginal product at zero? (if there is relatively gyu production)
when the Total Product curve reaches its max
if there is relatively gyu production
