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Micro Economics > chapter 8: Production and costs > Flashcards

chapter 8: Production and costs Flashcards

1
Q

what is the driving force of the modern economy

A

efficiency (efficient production)

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2
Q

what are the forms of efficient production

A

cost reduction

new technologies

margers and acquisitions

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3
Q

cost reduction

A

may come through collapsing jobs

or outsourcing particular jobs to lower-wage economies

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4
Q

new technologies

A

Can we replace old work patterns with the help of communications? Or with robots?

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5
Q

mergers and acquisitions

A

justified by claiming that a merged company will be more efficient

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6
Q

production function

A

technological relationship

specifies how much output can be produced with specific amounts of inputs

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7
Q

technological efficiency

A

maximum output is produced with the given set of inputs

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8
Q

economically efficient production structure

A

produces output at least cost

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9
Q

what are the types of time frames

A

short run

long run

very long run

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10
Q

short run

A

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

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11
Q

long run

A

All factors of production can be adjusted

ex: perhaps we will build more classrooms

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12
Q

very long run

A

New technology appears

another ex again with students: and we teach additional students on-line and so avoid adding new physical capital

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13
Q

Types of product in a short run production

A

total product (TP)

Marginal product (MP)

Average product (AP)

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14
Q

Total product (TP)

A

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)

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15
Q

Marginal Product (MP)

A

addition to output produced by each additional worker

MP = ΔQ / ΔL

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16
Q

Average product (AP)

A

relationship between output per worker and the number of workers employed

AP = Q / L

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17
Q

law of diminishing returns

A

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

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18
Q

What happens if the marginal product (MP) is bigger than Average product (AP)

A

MP > AP then AP is increases

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19
Q

What happens if the marginal product (MP) is smaller than Average product (AP)

A

MP < AP then AP decreases

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20
Q

Where does the MP curve interest the AP curve

A

At the maximum of the AP curve

21
Q

Type of costs in the short run

A

fixed costs

variable costs

total costs

marginal costs

22
Q

fixed costs (FC)

A

Costs that are independent of the level of output

ex: Overhead costs or research and development

Average fixed cost (AFC):

AFC = FC/Q

23
Q

variable costs (VC)

A

Costs that are directly related to the output produced

Example: Labour costs, material costs

Average variable cost (AVC)

AVC = VC/Q

24
Q

total costs (TC)

A

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
25
Q

Marginal cost (MC)

A

The cost of producing each additional unit of output

MC = ΔTC/ΔQ

Also MC = ΔTVC/ΔQ because fixed costs are fixed

26
Q

where does marginal costs (MC) intersect ATC and AVC

A

at their minumum

When MC = ATC, then ATC rises

Same relationship between MC and AVC

27
Q

MP intersects AP at max AP

MC intersects ATV and AVC at their minimum

is there a relationship?

A

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

28
Q

sunk cost

A

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

29
Q

what permits all factors of production to vary

A

long-run analysis

30
Q

scale of output

A

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

31
Q

types of scales in the long run production and costs

A

scale of output

increasing returns to scale

constant returns to scale

decreasing returns to scale

minimum efficient scale

32
Q

increasing returns to scale (IRS)

A

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

33
Q

constant return to scale (CRS)

A

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

34
Q

decreasing returns to scale (DRS)

A

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

35
Q

minimum efficient scale

A

A threshold size (operating level) such that no further economies of scale can be realized

36
Q

what is the long run ATC curve?

what does it represent In a graph?

A

the lower envelope of all possible short-run ATC curves

37
Q

what results in a declining LAC?

A

If the prices of K and L are fixed

Increasing returns to scale (IRS) results in a declining LAC (long run average cost)

38
Q

what results in a increasing LAC?

A

CRS implies constant LAC (long run average cost) and

decreasing returns to scale (DRS) implies increasing LAC

39
Q

how are the returns to scale defined

A

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

40
Q

what is required to spread the higher capital costs?

A

high output volumes

basically economies of scale

41
Q

where does the LRAC have to intersect LRMC

A

at minimum of LRAC

42
Q

technological change and globalization

A

Reduce costs and increase the point of minimum efficient scale

graphically this shifts the minimum of the LRAC rightwards and downwards

43
Q

clusters and externalities

A

Groups of like firms or workers exchanging information and ideas

ex: Silicon Valley

44
Q

learning by doing

A

Costs decline over time due to learning

incumbents have a cost advantage

45
Q

economies of scope

A

Multiproduct supply may be less costly than single product supply

46
Q

what can technological change achieve regarding costs?

A

reduces the unit production cost for any output produced

may also increase the minimum efficient scale (MES) threshold

47
Q

can we measure the marginal productivity of individual workers?

A

nah boy, the marginal productivity of a team

48
Q

When doe the marginal Product reach its maximum? (if there is relatively gyu production)

A

when the slope of the Total Product curve is at the max steepness

(if there is relatively gyu production)

49
Q

when is marginal product at zero? (if there is relatively gyu production)

A

when the Total Product curve reaches its max

if there is relatively gyu production

Micro Economics (13 decks)

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