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
What is meant by financial economies?
- Larger firms can obtain finance at much lower costs than smaller firms
What is meant by economies of scope?
- Producing multiple products is cheaper than the cost of producing one separately
What causes diseconomies of scale?
- Management/ co ordination problems
- Workers become less satisfied
- Production line holds up causing large knock o consequences for next stage
How do you calculate total revenue?
Price x quantity
How do you calculate average revenue?
Total revenue divided by total quantity
What is marginal revenue?
The extra total revenue from selling one additional unit
What must be in place for a firm to maxima profits?
Marginal revenue must equal marginal costs
If a firm is large relative to the market what happens to the price if theres an increase in supply?
An increase in supply will cause the price to fall
