Lecture 4 - Optimal production/supply Flashcards
How do you calculate profit?
Total revenue-Total cost
What is a variable cost?
- costs that change with output
What is a fixed cost?
- A cost which remains the same e.g rent
Whats a short run cost?
- Both fixed and variable
- At least one factor in the production is fixed
What is a long run cost?
- A period of time long enough for all factors to be varied
What is the law of diminishing returns?
- When one or more factors are held fixed, there will come a point beyond which the extra output from additional units of variable factor will diminish
Why does the law of diminishing returns only occur in the short run?
- Because in the long run all macros are variable
What is an explicit cost?
- A direct payment made by a business egg wage
What is an implicit cost?
- When a firm owns something that could earn them money in another way
How do you work out total costs?
Variable costs+fixed costs
What is an average cost? How do u calculate it?
- For a given output it is the cost per unit of production
= Total cost divided by output
What is a marginal cost?
The marginal cost is the cost of producing an additional unit
= Change in total cost divided by a change in output
What is meant by increasing scale of production?
- Means more products can be handles from the same location. Saving on shipping
- Lower ratio of manager to workers
- Same size accounting or finance team
What is meant by decreasing returns to scale?
- E.g Amazon doubles the size of its warehouse meaning its number of products it can produce increases. This also means that marginal costs increase
- However warehouse becomes to big to function e.g staff having to walk further for packages
What are the reasons for economies of scale?
- Greater efficiency of larger machines/companies
- spreading overheads
- Specialisation of labour
- Financial economies
- Economies of scope
