L11 - Short Run Production and Costs Flashcards
What factors of Production are variable in the Short Run and Long Run?
SR:
Only one factor of production (Labour) is variable. All others are fixed
LR:
All factors of production are variable
What is the underlying assumption for Firms?
Each firm’s objective to maximise profit
How do you calculate profit?
Profit (π) = Total Revenue - Total Cost
Total revenue (TR): the amount of money a firm receives from sales • Total cost (TC): the value the firm pays to produce
How do you calculate Total Revenue?
Price x Quantity
What are the two forms of Opportunity Cost to a firm?
EXPLICIT COST: Require a cash flow from the firm (When £1000 used to pay workers, that £1000 can’t be used elsewhere)
IMPLICIT COST: Does not require cash flow from the firm (Running business is costly could go spend time elsewhere)
What is Accounting Profit?
total revenue – explicit costs
What is Economic Profit?
total revenue – explicit costs – implicit costs
What does the Production Function state?
States how total output changes with labour (L) and capital (K).
In the short run labour is variable and capital fixed. A short-term production function states how total output changes with labour (L) for a given level of capital (K)
What is the Total Physical Product of Labour (TPPL)?
This is total output that is produced by the units of labour, for a given capital
What is the Average Physical Product of Labour (APPL)?
This is the average output produced by the units of labour, for a given capital
APPL = TPPL/L
What is the Marginal Physical Product of Labour (MPPL)?
This is the extra output of producing one more unit of labour, for a given capital
MPPL =
∆TPPL/∆L = TPPL+1 – TPPL
What is the Law of Diminishing Marginal Returns?
When some factors are fixed in the short run, employing another unit of a
variable factor eventually results in smaller and smaller increases in output
How do you plot the TPP,MPP ?
CHECK DIAGRAM
ALTHOUGH ITS AS SIMPLE AS PLOTTING POINTS FROM A TABLE
How do you calculate total costs (TC)?
Total Costs (TC) = Total Fixed Costs (TFC) + Total Variable Costs (TVC)
What are Total Fixed Costs?
Fixed costs are not related to the amount of output produced.
- They are incurred even if nothing is produced
- They can change but not as a result of increasing output
These relate to “costs for tractors etc”
What are Total Variable Costs?
Variable costs are related to the amount of output produced
• They are not incurred if nothing is produced
• They increase as more is produced
These relate to “costs of workers” in our previous example
How do you calculate Average Total Cost?
(ATC) =
average variable cost (AVC) + average fixed cost (AFC)
Or TC/Q
How do you calculate Marginal Costs?
This is the extra cost of producing one more unit of output
MC = ∆TC/∆Q
What happens when there is a falling MC?
increasing returns
CHECK DIAGRAM
What happens when there is a rising MC?
diminishing returns
CHECK DIAGRAM
What happens when marginal cost is below average cost?
average cost is falling
CHECK DIAGRAM
What happens when Marginal Cost is above average cost?
average cost is rising
CHECK DIAGRAM
What is the dip of the ATC (LRAC) called?
The minimum efficient scale
