Costs Flashcards
What are primary factor unit inputs?
Labour, capital (buildings, machinery), land
What are intermediate inputs?
energy, raw materials, components
What is an input in a firm?
Factor of production
The marginal product of labour is
the extra output produced by
an extra unit of labour, holding capital constant
The marginal product of capital is
the extra output produced by
an extra unit of capital, holding labour constant
When assessing labour productivity, what types of inputs are fixed?
Capital
What happens to marginal product of labour when the total product increases?
It rises then falls due to the law of diminishing returns
What does the law of diminishing returns state?
Beyond some point, as you
add more of one factor while holding other factors of production fixed,
your marginal product will fall
Why does marginal product of labour initially increase?
Specialisation and the division of labour
A firm has Increasing Returns to Scale if
when all inputs are
increased by the same proportion (say 10%), output increases by a greater proportion (i.e. 11% or more)
A firm has Constant Returns to Scale if
when all inputs are
increased by the same proportion (say 10%), output increases by the same proportion (i.e. 10%)
A firm has Decreasing Returns to Scale if
when all inputs are
increased by the same proportion (say 10%), output increases by a lower proportion (i.e. 9% or less)
Why might there be increasing returns to scale (5 reasons)?
- Learning by doing
- Specialisation
- Financial economies of scale
- Physical economies of scale
- Spreading the cost of indivisible inputs
Why might there be decreasing returns to scale (4 reasons)?
- Managerial diseconomies (more layers of managers lead to slower decision-making)
- Duplication of effort
- Communication costs
- Size constraints (office can only hold so many people)
What is market wage rate?
The cost of a unit of labour
What can firms adjust in the long run?
Labour and capital
What does the cost of capital depend on?
Whether it’s bought or rented
What is the cost of capital if bought?
Interest rate cost of the money used to buy it + depreciation cost
What is the cost of capital if rented?
rental cost
What are the rental and user costs in efficient capital markets?
The same
What are normal profits?
the return the money invested in the firm might earn elsewhere
What are supernormal profits?
profits earned by a firm, over and above the return it could have got in another activity with the same level of risk
What costs can’t be changed in the long run?
Sunk costs - can’t be recovered even if firm leaves industry
What is average cost?
fixed, variable or total cost per unit of output
