Micro Economics Flashcards
Define law of diminishing returns
When variable factors are added to production costs, both marginal and average returns will initially rise and then fall
Explain rise in law of diminishing returns
Productivity increases as quantity rises
Due to specialisation and better use of fixed factors of production
E.g at this point there is less teachers than classrooms
Explain fall in law of diminishing returns
Labour productivity decreases as quantity increases because at this point the fixed factors of production limits production
E.g not enough classrooms for teachers
Assumptions of law of diminishing returns
-Short run
- at least one factor of production is fixed
- each unit of variable factor is the same
- workers are equally trained
Marginal definition
Addition to total of the next
Short run def.
At least one fixed factor of production
Long run
All factors of production are variable
Types of fixed cost
-rent
- salaries
- interest on loans
Variable costs
- Wages
- Utility bills
- Raw materials
- Transport costs
What is MES
Minimum efficient scale
- lowest level of output to fully exploit economics of scale
What market has no MES
Natural monopoly
Economies of scale def.
As output increases, long run average cost decreases
Internal economies of scale examples
Risk bearing (can cover risk across more output)
Financial (more likely to get loans)
Managerial
Technical (machinery)
Marketing
Purchasing (bulk buying)
External economies of scale examples
Better transport infrastructure
Suppliers moving closer
Research and development firms moving closer
Incr. education and technology
Innovations within market
Diseconomies of scale def.
As output increases so does long run average costs
Types of diseconomies of scale
Control
Communication
Co-ordination
Motivation
