firms cost of production Flashcards
The difference between technology and technological change is that:
technology refers to the processes used by a firm to transform inputs into output, while technological change is a change in a firm’s ability to produce a given level of output with a given quantity of inputs.
A firm increased its production and sales because the firm’s manager rearranged the layout of his factory floor. This is an example of:
positive technological change.
What determines a firms cost of production ?
- technology used to produce the output
- productivity of its workers
- the cost of raw materials used in production
give examples of sources of technological advancement for a producer?
- better trained workers
- more efficient physical capital
- higher skill level of managers
A firm has successfully adopted a positive technological change when:
it can produce more output using the same inputs.
what is meant by the economic short run?
a firm’s technology and the size of its place of operations are fixed
what is meant by the economic long run?
the firm is able to adopt new technology and increase or decrease the size of its physical plant
what are total costs?
the sum of all inputs used in production
what are variable costs
costs that change as output changes
what are fixed costs?
costs that remain constant as output changes
what are explicit costs?
monetary costs
what are implicit costs
non-monetary opportunity costs
what is the production function ?
The relationship between the inputs employed by the firm and the maximum output it can produce with those inputs
what does the short-run production function hold constant?
fixed inputs
the additional output produced by a firm as a result of hiring one or more worker is____
the marginal product of labour
How do specialisation and division of labour typically affect the marginal product of labour?
Specialisation and division of labour cause the marginal product of labour to rise for the first few workers hired. Eventually, the law of diminishing returns causes the marginal product of labour to decline
what is the average product of labour?
The average product of labour is the total amount of output produced by a firm divided by the quantity of workers hired.
When the marginal product of labour is greater than the average product of labour, the average product of labour _______
increases
When the marginal product of labour is less than the average product of labour, the average product of labour __________
decreases
the law of diminishing returns states that …..
at some point, adding more of a variable input, such as labour, to the same amount of a fixed input, such as capital, will cause the marginal product of the variable input to decline.
what is the marginal cost of production?
the increase in total cost resulting from producing another unit of output
why is the marginal cost curve U-shaped?
when the marginal product of labour is rising, the marginal cost of output will be falling. When the marginal product of labour is falling, the marginal cost of output will be rising
when marginal cost is less than average total cost _______
average total cost falls
When marginal cost is greater than average total cost _______
average total cost rises
Explain why the marginal cost curve intersects the average variable cost curve at the level of output where average variable cost is at a minimum.
the marginal cost is the next unit produced, therefore when the next unit costs less than the AVC it pulls the average down, similarly when the price is above the AVC it pulls the AVC up
the curve which shows the lowest cost at which a firm is able to produce a given level of output in the long-run is called….
the long-run average cost curve
what affect do economies of scale have on the long-run average cost curve?
the long-run average cost curve falls as output expands
What is minimum efficient scale?
The level of output at which all economies of scale have been exhausted.
the firms will lose money if it remains in business
What are economies of scale?
economies of scale Exist when a firm’s long-run average costs fall as it increases its scale of production and the quantity of output it produces
What are diseconomies of scale?
diseconomies of scale exist when a firm’s long-run average costs rise as it increases its scale of production and the quantity of output it produces.
Why can short-run average total cost never be less than long-run average cost for a given level of output?
there are no fixed costs in the long run
What is the main reason that firms may eventually encounter diseconomies of scale as they keep increasing the size of their store or factory?
As the organisational structure of the firm becomes more complex, the level of difficulty and cost of monitoring and maintaining control may increase. Industrial disputes tend to occur more often in large organisations than in small businesses, which can also lead to rising costs
What is likely to happen in the long run to firms that do not reach minimum efficient scale?
marginal cost begins to rise, thus causing average cost to increase. eventually the business will become less profitable.
What are four reasons firms may experience economies of scale?
reasons:
1. technology makes it possible to increase production with a smaller proportional increase in inputs
2. both workers and managers can become more specialised, enabling them to be more productive as output increases
3. firms may be able to purchase inputs at lower costs than smaller competitors
4. it may be able to borrow money more cheaply
